Lenders' Economic Optimism Reaches Survey High As Profit Outlook Remains Subdued

Matthew Classick

202-752-3662

WASHINGTON, DC – Mortgage lender expectations for the economy and home prices reached survey highs amid challenges to profit margins from competition and a shift toward purchase mortgages, according to Fannie Mae’s first quarter 2017 Mortgage Lender Sentiment Survey^®. Lenders from institutions of all sizes are optimistic about the direction of the economy, with the share of lenders who think that the economy is on the right track reaching the highest level since the survey’s inception in the first quarter of 2014. However, demand growth expectations for purchase mortgages declined substantially, mostly attributable to unfavorable mortgage rates. The net share of lenders expecting increased purchase mortgage demand over the next three months for conventional mortgages fell to the lowest level recorded in any first quarter in the survey’s history. For refinance mortgages, the demand growth expectations across all loan types rose slightly from the prior quarter, which had registered the survey’s worst performance. On net, mortgage lenders’ outlook for profit margins rose slightly quarter-over-quarter but remains significantly lower than this time last year.

“This quarter, lenders’ optimism toward the overall economy and home price appreciation hit survey highs, mirroring the consumer confidence seen in our February Home Price Sentiment Index,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, lenders’ profit margin outlook remains significantly less positive than this time last year and two years ago.  Lenders cite competition from other lenders and a market shift from refinance to purchase – both of which reached survey highs – as the top reasons for the weak profit margin outlook.  With mortgage rates expected to rise, we expect refinance activity will fall and purchase affordability will tighten, increasing competitive pressure in a shrinking mortgage market. Lenders may choose to adjust their production capabilities and staff resources given their profitability outlook.”

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS

Purchase mortgage demand

• Purchase mortgage demand growth over the prior three months has steadily declined for all loan types, when compared with Q1 2016 and Q1 2015, reaching the lowest reading for any first quarter since Q1 2014.
• The near-term outlook showed a similar trend, with the net share expecting increased demand over the next three months declining to the lowest level for any first quarter since the survey’s inception in Q1 2014.
  

Refinance mortgage demand

• For refinance mortgages, the net share of lenders reporting rising demand over the prior three months fell to the lowest level since Q1 2014.
• On net, lenders reporting demand growth expectations for the next three months rose from survey lows last quarter (Q4 2016).

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

• On net, lenders continued reporting expectations to grow GSE (Fannie Mae and Freddie Mac) and Ginnie Mae shares and reduce portfolio retention and whole loan sales shares, although to a lesser extent.

Mortgage servicing rights execution

• This quarter, slightly more lenders reported expectations to increase rather than decrease their share of MSR sold and to decrease rather than increase the share of MSR retained that is serviced by a sub-servicer. The majority of lenders continue reporting expectations to maintain their MSR execution strategy.
  

Profit margin

• Lenders’ profit margin outlook rose slightly from its three-year low last quarter (Q4 2016) but remains significantly less positive than this time last year (Q1 2016) and two years ago (Q1 2015). Larger institutions are most likely to expect a decrease in profit margin outlook this quarter.
• Lenders expecting a lower profit outlook point primarily to competition from other lenders and market trend changes (e.g., shift from refinance to purchase) as the top reasons.
  • Government regulatory compliance, which has historically been a top reason for lenders’ decreased profit outlook, stayed near its survey low from last quarter.

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 first quarter 2017 Mortgage Lender Sentiment Survey was conducted between February 1, 2017 and February 13, 2017 by Penn Schoen Berland in coordination with Fannie Mae. For detailed findings from the first quarter 2017 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.