The share of lenders expecting their profit margins to increase hit a new high in the first quarter of 2020, according to the latest Mortgage Lender Sentiment Survey from Fannie Mae. This optimism was based on a strong increase in mortgage demand at the start of the year, with many lenders expecting this activity to continue into the second quarter of the year. However, Fannie Mae cautioned that this input was collected before widespread efforts to fight the spread of the coronavirus, including office closures and self-isolation.

Fifty-one percent of lenders said they expect their profit margins to increase in the next three months, up from 27 percent in the fourth quarter of 2019 and 20 percent in the first quarter of 2019. Just 4 percent said they think their profit margins will decrease, down from 28 percent in both the previous quarter and previous year.

About two-thirds of respondents—67 percent—credited greater consumer demand for their profitability expectations. Fifty-one percent said they believe they can achieve greater operational efficiency, while 18 percent said they think market trend changes will benefit them. Among those who said they believe their profit margins will shrink, half cited competition from other lenders while 42 percent said they think higher personnel costs will eat into their profits.

The results reflected strong demand for purchase mortgages in the three months prior to the survey, with the net share of respondents saying they had seen increased demand hitting survey highs across all loan types. A net share of 50 percent said they have seen more demand for mortgages backed by government-sponsored enterprises, such as Fannie Mae and Freddie Mac. A net share of about one-third of respondents said demand has gone up for non-GSE eligible mortgages and government-backed mortgages. In the first quarter of 2019, lenders were more likely to report lower demand in the previous three months for all loan types.

Similarly, the net share of respondents expecting greater demand in the next three months also reached new survey highs for all categories. On net, 75 percent said they think demand will increase for GSE eligible mortgages, 66 percent expected higher demand for government mortgages, and 58 percent said they think demand for non-GSE eligible mortgages will increase.

Lenders were slightly less likely than the previous quarter to say demand for refinance mortgages had increased, although they still reported healthy activity in the first quarter of the year. A net share of 75 percent reported increased demand for GSE eligible refinance mortgages, along with 59 percent saying there was higher demand for government-backed refinance mortgages and 50 percent saying there was more demand for non-GSE eligible mortgages.

Demand expectations for the next months reached new highs for GSE eligible refinance mortgages and government-backed refinance mortgages, with the net share of lenders expecting higher demand reaching 63 percent and 47 percent, respectively. A net share of 42 percent said they think they will see more demand for non-GSE eligible refinance mortgages.

Doug Duncan, senior vice president and chief economist at Fannie Mae, said the survey was taken in the first two weeks of February. He says this timeframe means the results don't reflect the potential impact of a drop in the 10-year Treasury note rate, which will likely lead to declines in mortgage rates.

"Past experience from 2012 and 2016 suggests that mortgage spreads generally take a few months to compress," said Duncan. "We anticipate similar rate dynamics this time, depending on the path of the underlying Treasury rate. Although uncertainty around coronavirus may have a dampening effect on housing market sentiment, for now we expect the continued low interest rate environment will help bolster mortgage volume, particularly refinances, as well as lender profitability, consistent with lenders' expectations."

Given the strong mortgage demand, few lenders were looking to ease their credit standards. On net, 5 percent said they had done so for non-GSE eligible mortgages and 2 percent said they had done so for GSE eligible mortgages, while a net share of 5 percent said they had tightened standards for government loans. A net share of 6 percent said they expect to ease credit standards for GSE eligible loans and 5 percent expected to do so for non-GSE eligible mortgages; lenders were unlikely to change their standards for government loans.

Lenders were also optimistic about the economy, with 90 percent saying they considered it to be on the right track. This was up 10 percentage points from the first quarter of 2019.

Seventy-seven percent said they think home prices will go up in the next 12 months, up from 35 percent in the first quarter of 2019. Sixty-five percent said they consider it easy for consumers to get a mortgage, up 9 percentage points from the previous year.

The Fannie Mae Mortgage Lender Sentiment Survey polls senior executives from several lending institutions each quarter to assess their perceptions of the mortgage market. The survey for the first quarter of 2020 collected responses from 195 executives representing 183 lending institutions.