Mortgage lenders struggle as demand for mainstream loans falters

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The net share of government and agency mortgage lenders who found spring homebuyer demand to be strong enough to drive purchase loan growth is considerably lower than three years ago.

Just 41% of lenders experienced government loan growth from purchases in the second quarter, according to Fannie Mae's Mortgage Lender Sentiment Survey. This marks a three-year low, down from 48% a year ago, 63% two years ago and 65% three years ago.

Also, half of mortgage lenders experienced higher agency-eligible purchase-loan volumes in the second quarter. This is on par with a year ago but down notably from 75% two years ago and 77% three years ago.

"Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply and strong home price appreciation, which have drastically reduced refinance activity," Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a press release.

The one sector lenders were bullish on: loans that were not eligible for purchase by the government-sponsored enterprises. More than half of lenders saw these increase in the past three months, as opposed to less than half a year ago. Lenders increasingly found looser underwriting in this sector.

The outlook for profit margins in the second quarter was slightly worse than a year ago, but better than it was during the seasonally weak first quarter.

Just under half of lenders continue to expect stable margins, but slightly fewer (18% compared to 23% a year ago) expect an increase. More than one-third forecast lower margins as compared to just under 30% a year ago. But during the first quarter, nearly half of lenders were braced for lower margins.

Although seasonal hiring ramped up in April in line with the expected pickup in business from the spring buying season, indications that demand has not been as strong as in past years suggest higher staffing levels may not be sustainable, according to Duncan.

"We expect this will prompt businesses to turn to cost-cutting as a means of managing their bottom lines, with payroll reduction likely," he said.

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Purchase GSEs Mortgage rates Refinance Home prices Fannie Mae