Profit Margins Weighing Heavy on Lenders’ Minds

Slow household formation, mortgage demand, and compliance costs associated with new regulatory requirements are impacting lenders' business operations and profitability in the housing market.

While the economy has come a long way since the Great Recession, the housing market continues to face challenges and opportunities. Strong labor markets and low mortgage rates have been driving forces behind the recovery period.

Fannie Mae's Mortgage Lender Sentiment Survey found depressed household formation and new regulatory requirements, like the TILA-RESPA Integrated Disclosure (TRID), are affecting business operations and profitability among lenders.

Freddie Mac determined that  lenders' pessimistic profit margin outlook is driven by two leading factors:

1. "Government regulatory compliance": The share of lenders citing this as one of the two most important factors reached a survey high of 61 percent in Q3 2015, indicating the impact of TRID, which has been a challenge for many lenders. The workflow changes and technology updates necessary to help ensure compliance have been significant, according to lenders.
2. "Competition from other lenders": The concern with increased market competition could be attributed to lenders' continued concerns with mortgage demand growth. With the refinance boom ending, lenders are competing for a smaller origination market. Survey results also show that lenders today are less likely than they were in 2014 to use new mortgage products or to expand marketing programs as strategies to increase their profit margin, indicating fewer opportunities for lenders to exploit. Part of this can be explained by the maturing of the Housing Affordable Refinance Program (HARP), which currently is set to expire at the end of 2016. Many lenders have successfully leveraged this program, but fewer HARP opportunities remain.

The survey results also showed that lenders cite "operational efficiency" as the key to success throughout 2015.

"Although lenders continue to face challenges from rising compliance costs and competitive pressure, this tough business environment creates an opportunity for lenders to harness these challenges to create competitive advantage," said Steve Solomon, Director of Strategic Customer Management at Fannie Mae. "Companies are finding innovative ways to leverage technology, streamline processes, optimize staff, and maximize vendor performance to not only maximize operational efficiency, but to also provide a better customer experience."

Click here to view the full survey.