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Lenders think third quarter might be even better

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Tuesday, September 29, 2020

The second quarter might have been historically strong for the mortgage industry, but according to Fannie Mae’s latest survey, lenders believe the third quarter will be as good – or maybe better.

Nearly half of lenders surveyed by Fannie said they believe profit margins will increase in the third quarter from the second quarter.

Fannie’s Q3 2020 Mortgage Lender Sentiment Survey (MLSS) found strong consumer demand was behind the optimism from lenders, 48 percent of whom said profit margins would increase, with 37 percent saying they would stay the same.

Reported consumer demand remained strong in the third quarter across all loan types, and in many cases neared or reached new highs, the survey found. Lenders who reported purchase mortgage demand growth for both the prior three months and the next three months rose significantly from last quarter across all loan types and is back on par with the same time last year.

“This quarter’s MLSS results align with the strong housing recovery amid the larger economic downturn due to COVID-19,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a release accompanying the survey results. “Lenders’ reported purchase mortgage demand for the prior three months across all loan types have returned from sharp drops to the levels seen last year for the same quarter.”

Lenders said refinance mortgage demand also remained extremely strong in the third quarter across all loan types on both a look-back and look-forward basis. On net, lenders also reported a further tightening of credit standards over the prior three months and expect them to remain largely the same over the next three months.

“Purchase demand growth expectations for the next three months reached the highest third-quarter readings since survey inception,” Duncan stated. “For the third consecutive quarter, lenders’ profitability outlook has remained a strong positive. Pent-up consumer demand, continued low mortgage rates, and favorable mortgage spreads helped drive lender profitability.

“This quarter, lenders on net continue to report tightening of credit standards for the prior three months but expected no further tightening next quarter. Lenders attributed credit tightening to the uncertainty on the economic recovery and labor markets resulting from COVID-19. 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.”

Mortgage spreads continue to remain above long-run averages, with the spread at 229 basis points in August – well above the 170 basis point long-run average – helping drive profitability.

As lenders reported purchase demand returning to levels seen in 2019, refi demand reached a survey high for government loans, and the second-highest reading since 2014 for GSE-eligible and non-GSE-eligible loans.

“Demand growth expectations on net for the next three months also remained high across all loan types, rising or remaining on par with the previous quarter,” the report stated.

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