As Mortgage Demand Cools and Competition Heats Up, More Lenders Are Planning to Ease Credit Standards

Katie Penote

202-752-2261

WASHINGTON, DC – More mortgage lenders say they have eased credit standards recently and expect further easing in the coming months, according to Fannie Mae’s second quarter 2017 Mortgage Lender Sentiment Survey^®. On net, the share of lenders reporting they have eased mortgage credit standards over the prior three months has ticked up gradually since the fourth quarter of 2016. Additionally, when anticipating the next three months, the net share of lenders saying they plan to ease credit standards for GSE eligible, non-GSE eligible, and government loans reached or surpassed survey highs this quarter.

Concerns regarding economic conditions were a top driver for changes in lending standards. Across the three loan types, the share of lenders who reported growth in purchase mortgage demand dropped to the lowest net reading in years for the second-quarter period. The drop in purchase mortgage demand also reflects the latest findings in the Fannie Mae National Housing Survey^®, in which the net share of consumers who reported that now is a good time to buy a home dropped to a record low. The results of both surveys mirror the ongoing narrative for housing: Tight inventory has pushed up home prices, which is weighing on affordability and constraining sales.

“Expectations to ease credit standards climbed to survey highpoints in the second quarter as more lenders reported slowing mortgage demand and increasing concerns about competition from other lenders,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Lenders cited additional contributing factors such as diminishing compliance concerns and more support from the GSEs, including clarification on representations and warranties and tools that provide greater certainty during the loan underwriting process. Easing credit standards might also be due in part to increased pressure to compete for declining mortgage volume. For the third consecutive quarter, the share of lenders expecting a decrease in profit margin over the next three months exceeded the share with a positive profit margin outlook. For the former, the percentage citing competition from other lenders as a reason for their negative outlook reached a survey high.”

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS

Purchase mortgage demand

• The net share of lenders reporting demand growth over the prior three months has fallen for all loan types when compared with Q2 2016 and Q2 2015, reaching the lowest reading for any second quarter over past two years.
• However, the net share of lenders expecting increased demand over the next three months remains relatively stable for the same quarter year over year.
  

Refinance mortgage demand

• The net share of lenders reporting rising demand over the prior three months fell significantly to a three-year low, across all loan types.
• The net share of lenders reporting demand growth expectations for the next three months has changed little from last quarter (Q1 2017).

Easing of credit standards

• The net share of lenders reporting easing of credit standards over the prior three months has gradually ticked up since Q4 2016.
• Net easing expectations for the next three months have also gradually climbed. In particular, the net easing share for GSE eligible loans and government loans for the next three months reached new survey highs this quarter (though modest in absolute percentage) and that for non-GSE eligible loans tied a survey high reached in Q2 2014.

Mortgage execution

• On net, lenders continue reporting expectations to grow GSE (Fannie Mae and Freddie Mac) and Ginnie Mae shares over the next 12 months and reduce portfolio retention and whole loan sales shares.

Mortgage servicing rights execution

• This quarter, slightly more lenders reported expectations to decrease rather than increase the share of MSR sold and the share of MSR retained and serviced in-house (as opposed to by a sub-servicer).
• The majority of lenders continued to report expectations to maintain their MSR execution strategy.
  

Profit margin

• The net share of lenders reporting a negative profit margin outlook has declined since reaching the survey’s worst reading in Q4 2016. However, more lenders reported a negative outlook than a positive outlook.
  • Mid-sized institutions are most likely to expect a net decrease in profit margin, while larger institutions are more likely to expect an net increase in profit margin.
• Concern about competition from other lenders set a new survey high this quarter across all profit-margin drivers, cited as the key reason for lenders’ decreased profit margin outlook.
• The perceived impact of “government regulatory compliance,” which declined sharply in Q4 2016, has remained low the past three quarters relative to most of the prior two years’ readings.

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 second quarter 2017 Mortgage Lender Sentiment Survey was conducted between May 3, 2017 and May 14, 2017 by Penn Schoen Berland in coordination with Fannie Mae. For detailed findings from the second 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.