Lender Sentiment Points to Declining Demand, Lower Profits

Mortgage lenders continue to expect disappointing profit margins. For the sixth consecutive quarter the net responses to a question about those margins in Fannie Mae's Mortgage Lender Sentiment Survey were in the negative. In the first quarter survey for 2018, the question about profits increasing resulted in net positive responses of -31%. Of the 52 percent of respondents who did not anticipate a decrease, 35 percent expected margins would remain unchanged over the next three months.

Those who expect a lower profit margin again pointed to "competition from other lenders" as the primary reason, setting another new survey high for the fifth consecutive quarter.  "Market trend changes" were cited as the next biggest reason for the first time in three quarters. Those expecting their margins to increase most frequently credited operational efficiencies.

Compounding their profit margin concerns, more lenders also have a negative view of consumer demand for purchase and refinance mortgages. The net share of lenders who reported growth in purchase demand over the prior three months was negative for the first time in four years, falling to the lowest reading since Q1 2014. Net yes responses as to any increase in demand for purchase mortgages over the previous three months was a negative 14 percent for FHA loans and -9 percent for GSE eligible loans.  The net for non-GSE eligible loans was at zero.  Those who had positive demand expectations over the next three months declined to the lowest first-quarter reading since the survey began, with net yes responses for all three loan types falling in the 31 to 38 percent range.

Lenders also continued to report a downbeat outlook regarding refinance demand over the prior three months and next three months.  The net negative for both forward- and backward-looking responses were between 48 and 59 percent for all three loan types.

Despite concerns about profit margins and declining demand, lenders report that the pace of loosening lending standards has slowed.   After rising for four consecutive quarters to reach a survey high in the prior quarter, the net share of lenders reporting easing of credit standards over the prior three months fell across all loan types, approaching the levels recorded a year ago (Q1 2017).

Doug Duncan, Fannie Mae's chief economist and a senior vice president said, "Lenders have faced an increasingly difficult market environment, as they report the most sluggish refinance demand expectations in more than a year, the most anemic purchase demand outlook on record for any first quarter, and the worst profit margin outlook in the survey's history. Despite the pressures to remain competitive and profitable, signs of lender caution appear to be emerging. While more lenders eased lending standards than tightened them, continuing the trend that started more than three years ago, the net share of lenders reporting easing credit standards declined for the first time in five quarters to the lowest level in a year." 

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 2018 Mortgage Lender Sentiment Survey was conducted between February 7, 2018 and February 19, 2018.

Responses were received from 196 lending institutions, 69 non-depository mortgage banks, 63 banks, and 56 credit unions.  Fannie Mae classified 64 as larger institutions, those with loan origination volume above $1.01 billion, putting them in the top 15 percent nationally. Fifty-one were mid-sized, with volumes falling between $248.3 million to $1.01 billion, putting them in the next 20 percent.  The remaining 81 institutions represented the bottom 65 percent of originators with volumes under $248.3 million.