There have been several ups and downs in the US mortgage industry over the past decade. However, one of the major factors that have been impacting profitability and business efficiency is profit margin compression. Lender profit margin expectations have steadily fallen over the years since 2015.
The recent figures aren’t very optimistic either. According to Fannie Mae’s quarterly Mortgage Lender Sentiment Survey, lenders’ profit margin outlook declined in the second quarter of 2021 with 46% of lenders claiming they are expecting lower profit margins throughout Q4 2021. Experts have predicted that lenders need to prepare for margin compression in the coming months because it’s likely to be significantly worse than in 2018.
Factors driving mortgage profit margin compression
There are a number of economic factors involved in driving mortgage profit margin compression. Some of the major reasons are as below:
1. More competition:
This is the time when the market is teeming with competition and lenders are facing the heat from startups and fintech companies that operate without much infrastructure, as well as large chains that have surplus money to take risks. Add to that the refinance boom coming to an end. All of this has made lenders feel the need to fight it out for the small origination market.
2. Lowering purchase demands:
In the recent past, the mortgage demands across the US have hit an abyss, almost coming to a halt. A Fannie Mae survey has pointed out that the purchase demand numbers are the lowest in the past few years. This has resulted in the average yield for earning assets also steadily going down.
3. Regulatory adherence:
A survey of lenders across the US has pointed that a whopping 61% believe that regulations sometimes smother their operational efficiency by reducing their profit margin outlook. The impact of challenging regulatory compliance has led to changes in the workflow of lenders while making smaller lenders explore other revenue generation points to raise their standards.
4. Widening primary/secondary spreads:
As origination volumes are consistently falling along with the refinances, the primary/secondary spread remains wide. This rise in origination costs is likely to further affect profit margins, even though there is a huge difference in the primary and secondary market mortgage rates.
What helps mortgage lenders fight margin compression?
As declining profitability remains a recurring concern, it is necessary for lenders to understand how they can combat margin compression. Here are two of the most effective ways and means that mortgage lenders can use to fight margin compression:
1. Improving the lending process
Optimizing and improving the lending process should be a go-to strategy at all levels. Improvement at a higher level can help lenders balance their different lending products such as mortgages, refinancing, etc. Leveraging end-to-end solutions to better the experience in terms of changes right from pre-origination can go a big way. At a lower level, optimization can help streamline day-to-day processes and build workflow efficiency.
2. Outsourcing mortgage support
Another very impactful way of handling lower profit margins is to outsource mortgage support. Associating with the right Mortgage Processing Companies will empower lenders and their businesses to achieve bigger goals by providing them with access to a team of experienced and dedicated loan processors. Outsourcing mortgage support can help lenders improve their profit margins, provide them with cost-effective services and increase their revenues.
Mortgage processing companies are known to use state-of-the-art technology to enhance the entire mortgage process. Since these companies have expert teams to handle the loan process, they have streamlined systems to offer faster turnaround time and enhanced profitability.
Why outsource mortgage support services to PrivoCrop?
PrivoCrop is a full-service mortgage solutions provider delivering mortgage origination, servicing, and title solutions. PrivoCrop offers end-to-end mortgage fulfilment services that can help lenders enhance efficiency while providing them with a competitive advantage and profit benefits.
The only service provider to serve mortgage lenders with a full scale of services in a mortgage lifecycle, PrivoCrop gives back-office support right from setup to Post-closing to help lenders save time and cost.