Lenders aren't taking the refinance boom for granted. Fannie Mae's second quarter Mortgage Lender Sentiment Survey found most respondents do not expect business, and therefore profits, to remain at current levels. Sixty-nine percent said profit margins would decline over the upcoming three months, 19 percent expect they will remain the same, and 11 percent believe they will increase. It was the third quarter in which pessimism predominated, but only 52 percent of respondents to the first quarter survey expected a decline.

Lenders reported they had seen increased demand for purchase mortgages over the prior three months as demand for refinancing wound down. The net share of lenders who reported that demand had grown turned negative for the first time since the first quarter of 2019 and was the lowest since the fourth quarter of 2018 for GSE-eligible and government loans.

Looking forward, lenders expect demand for purchase mortgages to remain relatively strong, but those expectations were lower than the previous quarter for GSE and government loans. 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," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "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. 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."

"Recent economic indicators, however, paint a somewhat more positive picture," continued Duncan. "Though 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, though 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. 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."

The net share of lenders reporting easing credit standards over the prior three months has gradually climbed since the second quarter of 2020 across all loan types. The net share of lenders expecting easing over the next three months ticked up slightly from last quarter for non-GSE-eligible loans but remained relatively steady for GSE-eligible and government loans.