Post-Election Surge in Mortgage Rates Paints Gloomy Picture for Lenders

Katie Penote

202-752-2261

WASHINGTON, DC – Mortgage lender expectations for near-term mortgage demand plummeted amid the rapid rise in interest rates following the U.S. presidential election, according to Fannie Mae’s fourth quarter 2016 Mortgage Lender Sentiment Survey®. Conducted after the election, the survey results show that the net share of lenders expecting an increase in purchase mortgage demand over the next three months was at or near survey lows across the different loan types – with a majority of lenders citing “mortgage rates are not favorable” for their worsening near-term outlook. Additionally, for refinance mortgage demand, the net share of lenders reporting growth expectations over the next three months fell to a survey low across all loan types. On net, after three straight quarters of a positive profit margin outlook, lenders reported a significant negative profit margin outlook, reaching a new survey low.

“The survey captured lenders’ bearish sentiment driven by the recent surge in mortgage rates – a level of bearishness last seen in the summer of 2013 during the taper tantrum,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “The sudden surge in mortgage rates weighed on expected future purchase and refinance volume. Downbeat production expectations suppressed lenders’ profit margin outlook to the worst showing in the survey’s short history. Rates could slowly unwind in coming quarters, reversing some of the expected decline in volume. However, the potential normalization of interest rates after a sustained period of strong refinancing volumes presents the biggest business challenge facing mortgage lenders in some time.”

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS

Purchase mortgage demand

• Purchase mortgage demand over the prior three months remained similar to the same time last year.
• However, on net, demand expectations for the next three months were at or near survey lows across the different loan types (GSE eligible, non-GSE eligible, government).
• The top reason for worsening near-term outlook across all mortgage types was “Mortgage rates are not favorable,” cited by two-thirds of lenders for conventional loans and slightly more than half of those for government loans – a survey high.

Refinance mortgage demand

• For refinance mortgages, the net share of lenders reporting rising demand over the prior three months rose significantly compared with the same period a year ago across all loan types.
• On net, lenders reporting demand growth expectations for the next three months dipped to a survey low across all loan types.

Easing of credit standards

• Lenders continued to report modest net easing of credit standards across all loan types for the prior three months, and continued to report expectations to modestly ease credit standards over the next three months, with the majority of lenders expecting their credit standards to stay about the same.

Mortgage execution

• Lenders continued reporting expectations to grow GSE (Fannie Mae and Freddie Mac) and Ginnie Mae shares and reduce portfolio retention shares.

Mortgage servicing rights execution

• Consistent with last quarter (Q3 2016) and a year ago (Q4 2015), lenders continued to report expectations to slightly decrease their share of MSR sold and MSR retained (serviced in-house); and slightly increase the share of MSR retained that is serviced by a sub-servicer.
  

Profit margin

• Lenders reported a significant net negative profit margin outlook after three straight quarters of net positive profit margin outlook, reaching a survey low but in line with a year ago when lenders focused on TRID implementation, likely reflecting their lower mortgage demand expectations.
• Lenders expecting a lower profit margin outlook pointed primarily to market trend changes (e.g., shift from refinance to purchase) as the top reason.
  • While government regulatory compliance has historically been one of the top two reasons for lenders’ decreased profit margin outlook, in Q4 2016 it fell significantly from the prior quarter’s (Q3 2016) survey low and from this time last year (Q4 2015), reaching a new survey low.
  • “Changes in market trends” is now the top reason for lenders’ decreased profit margin outlook, reaching a new survey high.

The Mortgage Lender Sentiment Survey 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 2016 Mortgage Lender Sentiment Survey was conducted between November 10, 2016 and November 20, 2016 by Penn Schoen Berland in coordination with Fannie Mae. For detailed findings from the fourth quarter 2016 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.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group or survey respondents included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group or survey respondents as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.