Bearish lender profitability outlook continues for the sixth consecutive quarter

“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,” Fannie Mae chief economist Doug Duncan said. “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.”

According to Fannie’s report, the average primary-secondary mortgage spread in Q3 2021 was 127 basis points, up by nine basis points from 2019, though down from the 174bps peak seen in Q3 2020.

Mortgage lenders also grew more pessimistic about the larger economy during the quarter, with 59% now reporting that the economy is on the wrong track, compared to 29% in Q1 2021.

“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,” Duncan said.