For the third consecutive quarter, an increased share of mortgage lenders are expecting profit margins to retreat further from last year's highs, according to Fannie Mae's 2021 Mortgage Lender Sentiment Survey. According to the second quarter survey, 69 percent of lenders believe profit margins will decrease in the next three months compared with 52 percent in the prior quarter, while 19 percent believe profits will remain the same and 11 percent believe profits will increase.

Looking at consumer demand over the prior three months, across all loan types, Fannie Mae’s survey showed more lenders reported increased demand for purchase mortgages but significantly reduced refinance mortgage demand.

Additionally, for refinance mortgages, the net share of lenders reporting demand growth over the prior three months turned net negative for the first time since the first quarter of 2019 and reached the lowest reading since the fourth quarter of 2018 for GSE-eligible and government loans, the survey indicated.

Looking ahead, lenders’ expectations for purchase demand growth over the next three months remain relatively strong but are down slightly from last quarter for GSE-eligible and government loans, while refinance demand expectations fell significantly across all loan types.

“Despite elevated optimism toward the U.S. economy, lenders show a cautious outlook for their mortgage business,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said. “This quarter, the largest net percentage of lenders in the survey’s seven-year history are expecting a decrease in their profit margin outlook. This is the third quarterly decline from the lender profitability highs of 2020.

“Those who expected a lower profit margin continued to cite competition from other lenders and market trend changes as the primary reasons,” Duncan added. “Lenders reported a significant refinance demand decline over the past three months and expect the decline to continue, with their refinance demand growth expectations reaching the lowest level seen since Q4 2018. With the shift from refinance to purchase business, some lenders commented that purchase transactions are harder to complete and have lower margins.”

Duncan also pointed out that recent economic indicators paint a somewhat more positive picture in that although the primary-secondary mortgage spread has continued to narrow, it remains wider than the level seen pre-pandemic, suggesting that lenders are still making profits, although not as much as they did in 2020.

“Purchase mortgage applications have trended slightly lower in recent weeks; however, they remain fairly strong, and higher than the pre-pandemic level, likely because of continued low mortgage rates,” Duncan said. “Our June National Housing Survey released early this week showed that consumer demand remains strong since 'home purchase on next move' is at a survey high, despite the challenges of accelerated home price appreciation and insufficient supply.”