If you can’t beat them, join them. Mortgage lenders reportedly eased their credit standards, and will likely to do so, bracing for a tougher competition when mortgage demand is declining.
Fannie Mae’s Mortgage Lender Sentiment Survey® for the quarter ended June 30, 2017 reported that the number of mortgage lenders who loosened their standards rose from the last quarter of 2016. This “easing” will likely be carried over the next three months as a survey-high number of mortgage lenders showed their intent to ease their standards in making government loans, GSE loans, and non-GSE loans.
Easing of Credit: Drivers, Challenges
“Tight inventory has pushed up home prices, which is weighing on affordability and constraining sales,” Fannie Mae said in its public statement accompanying the current survey.
According to the Fannie Mae survey, concerns over economic conditions primarily drove lenders to adjust their lending standards. Overall, there was a drop in the number of lenders who reported demand growth across all three mortgage types in 2Q17. Coincidentally, the number of Americans who thought that now is a good time to buy a home fell to a record low last month.
Fannie Mae Senior Vice President and Chief Economist Doug Duncan noted, “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.”
“Diminishing compliance concerns and more support from the GSEs” such as waiver of representations and warranties (e.g. property inspection waiver) also led some mortgage lenders to loosen up.
Lenders were also feeling the pressure to compete for a declining volume of mortgages. For three quarters in a row including 2Q17, there were more lenders who expect a decrease in their profit margin for the third quarter compared with those who expect an increased profit margin.
“For the former, the percentage citing competition from other lenders as a reason for their negative outlook reached a survey high,” Mr. Duncan said. To note, mid-sized lending institutions were more likely expected to post a net decrease in profit margin compared to larger institutions.
Other Lender Sentiments This Quarter
Fannie Mae’s Mortgage Lender Sentiment Survey® contains opinions and views of senior executives of its customer lending institutions with polls done on a quarterly basis. The current quarterly survey was conducted May 3 to 14, 2017.
- The decrease in the number of lenders who reported a demand growth in purchase mortgages was the lowest reading for a second quarter seen for the past two years. Nevertheless, the number of lenders who expect the demand in purchase mortgages to go up next quarter remains stable quarter over quarter.
- As to refinance mortgages, the number of lenders who reported rising demand across all loan types did fall significantly during 2Q17 – a three-year low.
- The number of lenders who expect demand growth in refi loans for the next quarter was slightly changed from the previous quarter.
- Lenders continue to report expectations for a growth in the shares of Enterprise and Ginnie Mac mortgages in the coming 12 months and note to reduce their shares of portfolio and wholesale loans.
- There was a slight increase in the number of lenders who expect to reduce their share of mortgage servicing rights (MSR) sold, as well as those serviced in-house and retained.
- The impact of government regulatory compliance remained low this quarter.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.