Competition Lowers Credit Standards and Profit Expectations

By: Jann Swanson •

Since the fourth quarter of 2016, lenders have increasingly reported to Fannie Mae that they have been loosening their home mortgage credit standards.  The company's third quarter 2017 Mortgage Lender Sentiment Survey has those responses at a survey high. Fannie Mae attributes the apparent easing in part to increased competition.   

Across all loan types - GSE Eligible, Non-GSE Eligible, and Government - the net share of lenders who reported easing rather than tightening credit standards over the prior three months was up, ranging from a net of 12 percent for government loans to 25 percent for GSE eligible loans. Very few lenders said they were tightening standards - between 1 and 3 percent across loan types.

When asked about their intentions for the next three months there were similar responses. While on net, expectations of future credit easing were essentially unchanged from the prior quarter, the net share expecting to ease standards for GSE Eligible loans over the next three months reached a survey high of 18 percent. Non-GSE Eligible and Government loans had nets of 13 percent and 10 percent respectively.  On a year-over-year basis, expectations of easing showed marked improvement for all loan types. 

"Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016. In particular, both the net share of lenders reporting easing on GSE-eligible loans for the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Lenders' comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans. We believe that GSE attempts to relieve repurchase concerns and expand credit for creditworthy borrowers have contributed to the easing trend.

Loan demand was down. The net share of lenders reporting growth in the demand for purchase mortgages of all three loans types was lower than in the third quarters of both 2015 and 2016.  Despite the roller-coaster appearance of the graph depicting forward-looking expectations for demand, Fannie Mae notes the net share of lenders expecting increased demand is relatively stable for the same quarter year over year. 

More lenders reported declining demand for refinance mortgages over the prior three months, a condition that has been on-going this year. Fannie Mae says the refi market today is a sharp contrast with a year earlier; then the net share reporting rising demand over the prior three months hit a survey high. The net responses for both present and expected demand in this survey was in negative territory across all loan types.

Lenders have reported a net profit margin outlook for the next three months that has, on net, been negative for four consecutive quarters, and has set repetitive new survey highs  for each of the last three. It is now significantly lower than in the third quarter of 2016. While institutions of all sizes and types generally reported an expected decrease in profit margins, larger institutions were the most likely to do so.  Competition from other lenders continues to be the primary reason cited by respondents for the poor outlook

Duncan said, "Meanwhile, market competitiveness also led to the fourth consecutive quarter in which lenders' net profit margin outlook deteriorated. The share of lenders citing competition from other lenders as the key reason for a negative profit market outlook rose to a new survey high." 

There were a few other highlights from the survey:

  • 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.
  • This quarter, slightly more lenders reported expectations to increase rather than decrease the share of MSR sold and the share of MSR retained and serviced by a subservicer.
  • The majority of lenders continued to report expectations to maintain their MSR execution strategy.
  • The perceived impact of "government regulatory compliance," which declined sharply in Q4 2016, has remained low. 

The Mortgage Lender Sentiment Survey polls senior executives of Fannie Mae's lending institution customers on a quarterly basis to assess their views and outlook across varied dimensions of the mortgage market. The Fannie Mae third quarter 2017 Mortgage Lender Sentiment Survey was conducted between August 2, 2017 and August 13, 2017.