Most lenders believe profits will rise in second quarter: Fannie Mae

Even with their businesses being affected by the coronavirus, more than half of mortgage lenders surveyed said their profits will increase this quarter, according to Fannie Mae.

The second-quarter survey found that 52% of the respondents expected higher profits than those earned in the first quarter, with another 24% saying they would be at the same level. This compares with 51% and 44%, respectively, in the first quarter survey and 41% and 47% for the second quarter of 2019.

However, on a quarter-to-quarter basis, the share of lenders expecting diminished profitability increased significantly, to 23% from 4%. In the year-ago survey, it was 12%.

Increased consumer demand was cited by 55% of respondents as a reason why they expected profits to rise. (Respondents were able to select multiple reasons.) On the other hand, competition was named as the top reason for lower profits by 41%.

But both camps cited the same additional reason for their outlook: government-sponsored enterprise pricing and policies.

Meanwhile, higher servicing costs — most likely because of dealing with pandemic-related forbearances — hit a survey-high as a reason cited for lower profits, but it was just 15%.

Mortgage lenders purchase loan demand sentiment decreased across all three product types — GSE, non-GSE eligible and government — for both the past three months and the next three.

For the non-GSE products, the net difference between those are optimistic and those that said purchase demand did/will decline was at an all-time low, Fannie Mae noted.

Only for GSE mortgages did more lenders feel there would be a gain in purchase movement, 39%, versus 35% that believed there would be a drop.

The survey was conducted between May 5 and May 18. However, the Mortgage Bankers Association's mortgage application survey for the week of May 8 was the fourth in a row with higher purchase activity. So while it might have appeared lenders had cause for optimism, at the time of the survey, many still might have had a darker view of the coronavirus' effect on their business.

"Lenders attributed the purchase mortgage demand decline to COVID-19-related factors, including home price uncertainty, higher unemployment, policy changes, and lower inventory," Fannie Mae Chief Economist Doug Duncan said in a press release. "There are, however, encouraging signs."

"For the agency lending market, the purchase demand outlook remains positive on net and is well above the fourth quarter of 2018 reading, a period of accelerated declines. If borrowers perceive the bottom of the economic downturn as having passed, there could be a pickup in purchase demand to take advantage of continued low mortgage rates.

"Lenders' profitability outlook remains positive, likely because of stable refinance demand, lender capacity constraints, and still-wide mortgage spreads. Nevertheless, challenges remain as the uncertainty around COVID-19 persists, in particular for mortgage servicing," Duncan said.

Over the next three months, 58% of respondents expected GSE refinance loan demand to increase, while 12% forecast a decrease.

But for other loan types, the gap in expected refi demand between the positive and negative was much closer. For non-GSE mortgages, 38% expected a demand gain compared with 31% looking for a drop, while for government loans, it was 39% and 21%, respectively.