Lenders Expect Easing in both Mortgage Demand, Credit Standards
In its latest Mortgage Lender Sentiment Survey Fannie Mae detected an interesting switch in attitudes and opinions in two areas. The third-quarter survey, the third since Fannie Mae originated the series last March, found that large lenders expect to see their underwriting standards ease over the next three months. Perhaps not coincidentally, the share of lenders of lenders, regardless of the size of the institutions they represent, who expect the demand for purchase mortgages to go up over the next three months dropped by 26 to 33 percentage points depending on the mortgage type.
The largest decline in expectations was for GSE-eligible loans where the percentage of respondents expecting borrower demand to increase fell from 54 percent in the second quarter to 21 percent. The other categories fared only marginally better. Expectations of increasing demand for non-GSE eligible loans were reported by 53 percent of participants in the second quarter but only 27 percent in the third. Only 16 percent looked for increased demand in government loans compared to 42 percent the previous quarter.
Two hundred fourteen executive officers representing 196 lenders participated in the 10 to 15 minute on-line survey. Fifty-seven of the participating institutions were mortgage banks and 128 were depository institutions. Fifty of the entities were classified as larger institutions with 2012 total industry loan origination volume in the top 15 percent or above $1.14 billion. There were 55 mid-sized institutions that participated and those had an origination volume which put them in the 16 percent to 35 percent range or $325 million to $1.14 billion. The 91 remaining respondents classified as smaller institutions fell below those benchmarks.
Overall, most lenders reported no major changes in their underwriting credit standards for the prior three months and expected no major changes for the next three months. However, the credit tightening for GSE eligible loans noted in the first quarter seems to have gradually trended down in quarters two and three. Larger lenders continue to be more likely than smaller lenders to say their credit standards eased over the prior three months and that they expect standards to ease during the next three months, in particular for non-GSE eligible and government loans. Fannie Mae said perhaps this indicates an effort to boost purchase mortgage activity before the year comes to a close.
"Lenders' diminished purchase mortgage demand outlook is broadly in line with the softened consumer housing sentiment seen in the August National Housing Survey results released last week," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Historically, as lenders face a more competitive market for loan volume, it's not uncommon to see some loosening in the lending standards; however, this time, the easing will likely be around the edges." These latest third quarter results are largely consistent with Fannie Mae's study released last month, titled "Impact of QM," that shows larger lenders are more likely than smaller lenders to pursue non-QM loans. "Larger lenders are expecting to tap into the non-GSE-eligible and government loan market to maintain or grow their market share and offset their anticipated slowing mortgage demand as the peak spring/summer selling seasons are coming to an end," said Duncan.
Interestingly senior mortgage executives continue to be much more pessimistic than the general public when it comes to the ease of getting a mortgage. Fannie Mae compared the lenders' responses to how easy it would be to get a mortgage to answers to the same question gathered from the most recent National Housing Survey conducted with consumer homeowners and renters. Only 15 percent of the senior executives (down from 19 percent in the second quarter) thought it was easy for consumers to get a mortgage today. Among those consumers themselves 48 percent thought that was true.
Those executives however have an optimistic streak. When confronted with a question about the direction of the economy, 51 percent of the lenders said it was on the right track compared to 35 percent of National Housing Survey respondents.
The lenders were slightly more bullish about home prices as well. Forty-eight percent expect those prices to rise over the next 12 months, only 2 percent expect a decline. Among consumers price increases were expected by 42 percent and declines by 9 percent. The average increase among those expecting price hikes was 1.9 percent for the executives (down from 3.2 percent in the first quarter) and a slightly higher 2.1 percent for consumers.
The Mortgage Lender Sentiment Survey which was conducted between August 6 and 26 also found that the majority of lenders surveyed reported, as they had in the two previous surveys, that they expect to maintain both their Mortgage Servicing Rights and their post mortgage origination execution strategies for the next three months. However their profit margin outlook appears to have worsened. The net percentage of larger and mid-sized lenders reporting decreased profit margin expectations increased from Q2 to Q3.