Fannie Mae's Q4 Mortgage Lender Sentiment Survey (MLSS) found lenders lowering their expectations for profits over the next three months. Only 19 percent of those responding to the survey think their profit margins will increase, one-third expect no change while 48 percent are looking for a decline. In the third quarter survey 48 percent were expecting their profits to grow. Fannie Mae says this is a change from the prior six quarters in which lenders indicated increasingly optimistic profitability expectations.



Lenders reported that consumer demand remained strong in the fourth quarter for all loan types. Demand for purchase mortgages set a new survey high for GSE-eligible loans and a new fourth-quarter survey high for government loans. Looking ahead, purchase mortgage demand expectations fell compared to the prior quarter but reached new highs for any fourth quarter in the survey's history. For refinances, lenders reported that consumer demand fell on both a looking-back and looking-ahead basis across all loan types but generally remains strong.



Fannie Mae Senior Vice President and Chief Economist Doug Duncan said, "Consistent with key industry indicators, the fourth quarter MLSS results support the strength of the mortgage industry we've seen in 2020, despite the pandemic. We currently expect loan origination volume to total $4.1 trillion in 2020, the highest on record since 2003."

"However, moving into 2021, lender sentiment paints a more cautious picture, aligning neatly with our recently reported consumer-side sentiment expectations, which appear to have plateaued, and supporting our forecast for a more modest pace of housing growth," Duncan continued. "Refinance demand growth expectations for the next three months fell significantly from last quarter across all loan types. Additionally, lenders' profitability outlook has weakened. The resurgence of COVID-19 cases and uncertainty around the economic recovery path pose risks to the pace of housing growth. Pending sales and purchase mortgage applications have recently pulled back from highs as pent-up demand from the spring has receded. Tight inventories, along with higher home prices, will likely continue to restrain sales, and the recent compression of the primary/secondary mortgage spread appears to confirm mortgage lenders' lower profitability expectations."

After peaking in April, mortgage spreads have narrowed steadily. In November, as the 10-year Treasury increased, the average primary mortgage spread (FRM 30 contract rate versus 10-year Treasury) came in at 190 basis points, returning to pre-pandemic levels. However, mortgage spreads remain above the long-run average of approximately 170 basis points.

Lenders on net continued to report that credit standards tightened for the prior three months, though significantly less so compared to last quarter. Most lenders expect credit standards to stay about the same for the next three months.