Inflation, Interest Rates, and Military Conflict Weigh on Lenders

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April 9, 2022
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Denese Joyner
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Posted By Kyle G. Horst On March 10, 2022 @ 2:47 pm In Daily Dose,Data,Featured,Market Studies,News 

Continuing a quarterly survey of mortgage executives that initially started in 2014, Fannie Mae [1] has published its latest Mortgage Lender Sentiment Survey [2] for the first quarter of 2022 finding that lenders are becoming increasingly bearish due to current market conditions. 

The survey, which was conducted during the first two weeks of February polling 200 senior executives, intends to assess their views and outlooks across varied dimensions of the mortgage market. The 200 executives represent 188 institutions of which 83 were non-depository mortgage banks, 62 depository institutions, and 40 Credit unions. 

Among respondents, 75% of mortgage lenders believe profit margins will decrease in the next three months (up 10% from the fourth quarter of 2021), 17% believe profits will remain the same, while 9% believe profits will go up. Respondents cited stiff competition from other lenders, market trend changes, and consumer demand as key reasons behind their answers on declining profitability expectations. This is the sixth quarter that lenders profitability outlook has declined—it also represents a new survey low. 

Mortgage lenders also grew more pessimistic about the larger economy in the first quarter as 59% reported that they believe the economy is on the wrong track, compared to 29% from the first quarter of 2021. 

Across all loan types, more lenders reported reduced consumer demand over the previous quarter for purchase and refi applications. Looking ahead, the vast majority of lenders continue to expect demand for refi mortgages to wane. 

“For the sixth consecutive quarter, mortgage lenders expressed bearishness about near-term profit margin expectations amid headwinds from declining refinance activity, slower purchase mortgage demand growth, and narrowing spreads,” said Doug Duncan [3], Senior Vice President and Chief Economist at Fannie Mae. “For consumers, rising interest rates, lack of supply, and strong home price appreciation have reduced refinance activity and further constrained home purchase affordability, which, of course, is dampening lenders’ expectations of future business activity. Numerous uncertainties, including heightened inflation and the Fed’s monetary policy reaction, which must now also account for the inflationary impact of Russia’s war on Ukraine, suggest increased market volatility, but the general underlying, upward rate trend aligns with lenders’ expectations.” 

Other high-level takeaways from the report include: 

Primary-secondary mortgage spread remains elevated 

“The primary-secondary mortgage spread averaged 127 basis points in Q3 2021, 9 basis points above the 2019 average, though down from the peak of 174 basis points seen in Q3 2020.”  

Consumer demand expected to remain largely stable for purchase mortgages but decline for refinances 

“For purchase mortgages, demand growth for the prior three months continued its downward trend. The net share of lenders reporting demand growth over the prior three months reached the lowest reading for any first quarter over the past two years across all loan types. For the next three months, the net share of lenders expecting demand growth climbed significantly from last quarter across all loan types, but still showed the lowest reading for any first quarter in survey history.” 

“For refinance mortgages, the net share of lenders reporting demand growth over the prior three months, as well as the net share expecting demand growth for the next three months, remained similar to last quarter but generally continued its downward trend across all loan types—reaching the lowest readings in three years (since Q1 2019). For government loans, the net share expecting demand growth over the next three months reached a new survey low (since survey inception in Q1 2014).”  

Lenders expect credit standards to remain largely unchanged 

“The net share of lenders reporting easing credit standards over the prior three months, as well as the net share expecting easing over the next three months, remained generally flat across the past four quarters.”  

Consumers continue to report widely divergent homebuying and home-selling conditions  

“In coordination with PSB, Fannie Mae also surveys consumers monthly as part of its National Housing Survey [4], of which the Home Purchase Sentiment Index [5] is derived. In February, consumers continued to report widely divergent views of homebuying and home-selling conditions. Only 29% of consumers reported that it was ‘a good time to buy’ a home, while 72% believe it’s a ‘good time to sell.’ More consumers also reported expectations that mortgage rates and home prices will continue to rise in the next 12 months.” 

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