Further Easing of Mortgage Credit Standards on the Horizon, According to Lenders

Katie Penote

202-752-2261

WASHINGTON, DC – Mortgage lenders continue to report that they have eased and expect to continue easing their credit standards, according to Fannie Mae's fourth quarter 2015 Mortgage Lender Sentiment Survey^™. Conducted in November, the survey results show that more lenders reported expectations to ease rather than tighten mortgage credit standards for GSE-eligible loans and government loans over the next three months, which may help mitigate some of the decline of housing affordability moving into 2016. The share of lenders expecting to ease standards for GSE-eligible loans climbed to 16 percent while the share expecting to tighten standards dropped to 2 percent. In addition, more lenders reported easing as opposed to tightening of credit standards over the prior three months across all loan types, although the net shares fell somewhat from last quarter's survey highs.

“Several factors point to constrained housing affordability in 2016, particularly for first-time home buyers, including slow single-family supply response and limited inventory of starter homes on the market, strong inflation-adjusted house price appreciation outpacing household income growth, and an upward bias in mortgage rates. However, on net, lenders told us in our fourth-quarter Mortgage Lender Sentiment Survey that they have eased and expect to continue to ease credit standards, which was a consistent trend throughout 2015,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Thoughtful easing will help mitigate some of the affordability decline moving into 2016. The use of Fannie Mae’s HomeReady™ mortgage was cited by some lenders in the survey to explain their expectations for easing credit standards and how they will increase consumers’ access to mortgage credit.”

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS

Purchase Mortgage Demand over Past Three Months and Expectations for Next Three Months Continues to Decline, but Up Overall from Last Year

• The net share of lenders reporting increased purchase mortgage demand expectations for the next three months has continued to decline throughout the year after reaching survey highs in Q2, likely reflecting seasonal influences, but lenders’ purchase mortgage demand outlook remains higher than 2014.
• The net share of lenders reporting increased mortgage demand over the prior three months is down from the previous quarter across all loan types, but remains higher than the same period last year.

Continued Easing of Credit Standards Reported

• Lenders continue to report expectations to ease credit standards over the next three months for GSE eligible and government loans, with the net percentage of lenders reporting easing expectations reaching a new survey high.
• More lenders reported easing of credit standards than tightening them over the prior three months across all loan types, continuing a trend seen throughout the year.
• However, the net share of lenders reporting easing of credit standards over the prior three months fell somewhat from last quarter’s survey highs, across all loan types.

Stable Mortgage Execution Outlook

• Most institutions reported expectations to maintain their strategy with regard to secondary market originations over the next 12 months. However, more institutions continue to report expectations to increase rather than decrease the shares of loan originations sold to Ginnie Mae, continuing a trend seen in previous quarters.
• Throughout 2015, more lenders continue to report expectations to decrease rather than increase their portfolio retention shares (mainly larger institutions) and whole loan sales to non-GSE correspondents over the next 12 months.

Stable Mortgage Servicing Rights (MSR) Execution Outlook

• More lenders reported expectations to decrease rather than increase the share of their MSRs sold to a third party. In addition, more lenders reported expectations to increase rather than decrease the share of their MSRs retained and serviced by a subservicer.
• The net share of lenders reporting expectations to increase MSRs sold to a third party grew by 12 percentage points since Q3 2015. As would be expected, the net share of lenders reporting increased shares of MSRs retained dropped this quarter.

Fewer Lenders Expecting an Increase in Profit Margin over the Next Three Months

• Lenders’ profit margin outlook has gradually trended down each quarter this year.
• This quarter, the net share of lenders expecting an increased profit margin over the next three months has declined to negative 29%, hitting a new survey low. Approximately one in two of these lenders cite “government regulatory compliance” as a key driver.
• Larger lenders and mortgage banks reported a bigger negative profit margin outlook than the total survey sample, with a net percentage score of negative 56% and negative 53%, respectively.

The Mortgage Lender Sentiment Survey conducted by Fannie Mae polls senior executives of its lending institution customers on a quarterly basis to assess their views and outlook across varied dimensions of the mortgage market. The Fannie Mae fourth quarter 2015 Mortgage Lender Sentiment Survey was conducted between November 4, 2015 and November 13, 2015 by Penn Schoen Berland in coordination with Fannie Mae. For detailed findings from the fourth quarter 2015 survey, as well as survey questionnaires and other supporting documents, please visit the Fannie Mae Mortgage Lender Sentiment Survey page on fanniemae.com. Also available on the site are special topic analyses, which focus on findings and analyses of important industry topics.