Purchase mortgage business will remain strong, lenders say

Mortgage lenders expect consumer demand for both purchase and refinance loans to remain strong over the next three months, driving optimism when it comes to profitability, a Fannie Mae survey found.

"Purchase demand growth expectations for the next three months reached the highest third-quarter readings since survey inception," Fannie Mae Chief Economist Doug Duncan said in a press release.

"For the third consecutive quarter, lenders' profitability outlook has remained a strong positive,” he added. “Pent-up consumer demand, continued low mortgage rates, and favorable mortgage spreads helped drive lender profitability."

This survey was conducted between Aug. 4 and Aug. 16. On the evening of Aug. 12, Fannie Mae and Freddie Mac announced the imposition of an adverse market fee on refinancings to go into effect on Sept. 1. Because of the tight time frame, many lenders were concerned the fee would reduce their per-loan earnings in the short term, and increase the costs of refis for borrowers in the longer term. On Aug. 25, the Federal Housing Finance Agency delayed the fee's implementation date until Dec. 1.

But Duncan also offered a note of caution. "Although the housing market is showing remarkable strength amid the economic and health crisis, potential longer-term downside risks remain, including labor market weakness, low inventory and home price uncertainty," he said.

About 59% of respondents to the third-quarter Fannie Mae Mortgage Lender Sentiment Survey expected demand for conforming purchase mortgages to increase going forward, while 8% felt they would see less business from homebuyers.

This is a remarkable turnaround from the second quarter survey released in June, a period during which much of the nation was still determining the effects of the coronavirus on the economy. At that time, 39% of respondents said purchase demand would increase at that time and 34% expected it to decrease.

But a change in sentiment occurred across other loan types as well. For government mortgage products, 43% of respondents expected purchase volume to increase in the next three months, while 8% expected a decrease. In the second quarter, more respondents expected a decrease, 40%, versus 30% expecting an increase.

When it comes to nonconforming loans, the third quarter survey finds that 43% expected an increase in demand for purchase mortgages of this type, while 14% looked for a decrease. In the second quarter, it was a 51% decrease and a 26% increase. Nonconforming product availability that was hardest hit at the start of the pandemic due to the secondary market dislocation.

The conforming refinance outlook is nearly as positive, with 56% of third-quarter respondents expecting an increase over the next three months and 9% projecting a decrease. This is comparable to the second quarter, when 58% expected refinance business to grow in the three months after that survey, while 12% expected a decrease.

About 40% of third-quarter respondents expect an increase in government product refi demand over the next three months, while 10% predict a decline. For nonconforming, the split is 46% increase to 12% decrease.

But profitability expectations remain elevated and near the record high set one year ago.

Just under half of respondents — 48% — said they expected their profits to increase in the second quarter, while 37% said they would remain the same and 15% believed they would decrease.

About 69% of those who have a positive outlook on profitability cited consumer demand as their source of optimism, well ahead of GSE policies and pricing, cited by 35%.

About 62% of those with negative attitudes about profitability over the next three months blamed competition from other lenders, while staffing costs were cited by 32% and GSE policies and pricing, 31%. Lenders could chose more than one response to this question.