Competition and Margin Compression in Lending: The Squeeze Is On

More than half of mortgage lenders expect profit margins to decline in the months ahead. Their sentiment matches the data. After peaking in April 2020, mortgage margins have narrowed steadily. The most recent report from Fannie Mae from February noted spreads had compressed to 55 basis points, well below the prior decade’s average of approximately 170 basis points.1 

Lenders who expected a lower profit margin cited competition as the primary reason — reaching a survey high last seen in Q1 and Q2 of 2018 — according to Fannie Mae’s Q1 2021 Mortgage Lender Sentiment Survey. Also, for the first time since Q4 2019, respondents noted a market shift from refinance to purchase as the next biggest reason for margin compression. 

Shift to Purchase, New Competition 

Margin compression correlates with two competitive trends: a shift to purchase and new fintech entrants.  

Economists have forecast rising rates since the beginning of the year. The MBA projects 30-year fixed mortgage rates will rise to 4.4% by 2022. Experts also predict a 40% contraction in the mortgage market. The MBA expects the mortgage loan market to go from being 41% purchase units in 2020 (the other 59% were refinances) to 77% purchase units in 2022. And total homes sold may rise from 6.49 million in 2020 to 7.45 million in 2022. 

Meanwhile, challenger banks and lenders are moving in to capture their piece of what has been a booming U.S. mortgage market. Mortgage fintech fundraising set records in first quarter of 2021, according to CB Insights data that cited 57 companies raising $100 million or more.  
The inflection of market conditions and a wave of new, well-funded lenders will turn up the pressure on lenders in late 2021 and 2022.  

Focusing on the Big Three: Borrowers, Realtor, and LOs  

Veteran mortgage lenders know the market is cyclical. To thrive, lenders will need to focus on three not-unfamiliar realtor/homebuilder tactics to insulate against market pressures while also setting them up for long-term growth.  

Owning the referral, retaining preapprovals, and fostering strategic partnerships are all tactics related to realtor (and home builder) relationships that will return to center stage. 

That’s because the best way for loan officers to convert and close a pre-approved buyer during the long home shopping process is to be closely aligned with the realtor serving them. Realtors want referrals from lenders, and they need partners that can compliantly support them in growing their business through co-marketing.  

Strict realtor-lender joint marketing regs can make this complicated. As a result, compliant, aggressive co-marketing will be critical to win in 2021 — when 584,000 loan officers are competing for just 5.05 million financed home sales — and into 2022.  

So what can you do in 2021 to meet these challenges head-on? Read our new eBook 3 Ways Mortgage Leaders Can Thrive During Huge 2021 Market Shifts to find out. 


  1. Mortgage Lender Sentiment Survey, March 2021.