Fannie Mae finds that lenders are easing credit standards

Lenders have been more likely to ease their credit standards when considering mortgage applications in recent months, according to a quarterly analysis by Fannie Mae.

The Mortgage Lender Sentiment Survey is issued each quarter to the senior executives of Fannie Mae's lending institution partners. A total of 209 lending institutions were polled at the end of August.

In the third quarter of 2015, 23 percent of lending institutions said they have eased credit standards for GSE eligible mortgages in the past three months. These mortgages are defined as loans that qualify for the underwriting guidelines of government-sponsored enterprises such as Fannie Mae and Freddie Mac.

The share is a significant increase from the second quarter of the year, when only 12 percent of institutions said they had eased credit standards for GSE eligible mortgages. Seventy-three percent of institutions said their credit standards are relatively unchanged, 9 percent below the previous quarter and 3 percent higher than the previous year. Three percent said they have tightened their standards, down 15 percent from the third quarter of 2014 and 3 percent from the second quarter of 2015.

Larger and mid-sized institutions were more likely to ease credit standards. Among large institutions, the share saying they have eased their standards in the past three months jumped from 9 percent in the second quarter of 2015 to 32 percent in the third quarter; this share was also 13 percent more than the third quarter of 2014. Among mid-sized institutions, 27 percent said they have eased standards; this marked a 16 percent increase from both the previous quarter and the previous year.

Smaller institutions offering GSE eligible mortgages were less likely to have eased their credit standards. Nine percent said they have done so in the past three months, a 7 percent decrease from the previous quarter but a 5 percent increase from the previous year. These institutions were also unlikely to have tightened their restrictions, however; only 4 percent said they had done so, down 5 percent from the second quarter of 2015 and 16 percent from the third quarter of 2015.

Twenty-two percent of lending institutions in the survey said their credit standards for non-GSE eligible mortgages have eased, a 9 percent increase from the previous quarter but a 3 percent decrease from the third quarter of 2014. Seventy-five percent said credit standards have stayed the same, 2 percent more than the previous year but 5 percent less than the previous quarter. The share that have tightened standards fell from 17 percent in the third quarter of 2014 to 6 percent in the second quarter of 2015 and 4 percent in the third quarter.

Eighty-two percent of lenders offering government loans, such as the Federal Housing Administration, said their credit standards have remained relatively unchanged. This share was 15 percent higher than the previous year and 2 percent lower than the previous quarter.

Thirteen percent said they have eased credit standards on government loans, a 3 percent increase from the second quarter of 2015 but a 2 percent decrease from the third quarter of 2014. Five percent said standards have tightened, unchanged from the previous quarter but 12 percent lower than the previous year.

"Lenders may be becoming more comfortable with the GSEs' updated guidelines intended to provide them greater certainty regarding representations and warranties," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Lenders also may be getting more familiar with the regulatory and compliance environment. Finally, lenders may be removing credit overlays. Overall, we expect that lenders' tendency toward easing credit standards, together with relatively low mortgage rates and a strengthening labor market, will continue to support the housing market expansion."

The majority of lenders said they expect credit standards to remain unchanged in the next three months. Eighty-five percent of those offering GSE eligible loans, 78 percent of those offering non-GSE eligible loans, and 85 percent of those offering government loans don't expect their standards to change significantly.

Eleven percent of institutions offering GSE eligible mortgages expect their credit standards will ease in the next three months, while 4 percent said they believe standards will tighten. Sixteen percent of those offering non-GSE eligible mortgages believe their standards will be eased, compared to 6 percent who think they will tighten. Eight percent of the institutions offering government loans expect their standards to tighten, 1 percent more than the share anticipating that they will be eased.

Demand

Despite the loosening of credit standards, lending institutions said demand for mortgages has fallen in recent months. However, demand was often considerably higher than a year ago.

Among those offering GSE eligible mortgages, 73 percent said demand has gone up in the past three months. This share was 4 percent lower than the previous quarter, but 20 percent higher than the third quarter of 2014.

Twenty-one percent of lenders offering GSE eligible mortgages said demand has remained the same, 5 percent higher than the second quarter of 2015 and 10 percent lower than the previous year. Six percent said demand went down, unchanged from the previous quarter but an 11 percent drop from the third quarter of 2014.

Fifty-seven percent of institutions offering non-GSE mortgages said demand increased in the previous three months, 8 percent lower than the previous year and 5 percent lower than the previous quarter. Thirty-three percent said demand had not changed, an increase of 6 percent from the third quarter of 2014 and 3 percent from the second quarter of 2015. Ten percent said demand had gone down, 4 percent higher than the previous quarter and 2 percent higher than the previous year.

Sixty-three percent of institutions offering government mortgages said demand increased in the previous three months, a 20 percent increase from the third quarter of 2014 but 2 percent less than the second quarter of 2015. Twenty-seven percent said demand has not changed, the same as the previous quarter and 7 percent less than the previous year. The share reporting lower demand was 10 percent, 13 percent lower than the third quarter of 2014 but 3 percent higher than the second quarter of 2015.

Lenders also did not expect that there will be a surge of demand in the remaining months of the year. Among GSE eligible institutions, 43 percent believed demand will stay the same in the fourth quarter, 37 percent expect it to increase, and 19 percent think it will decrease.

Forty-nine percent of non-GSE eligible lenders think demand for mortgages will stay the same, compared to 34 percent who think it will increase and 17 percent who believe it will decrease. Forty-eight percent of institutions offering government loans expect demand to stay the same, while 34 percent think it will increase and 18 percent believe it will decrease.

Optimism

Compared to the results of Fannie Mae's National Housing Survey, senior mortgage executives were much more optimistic about the state of the housing market and economy. However, these executives were also more likely to consider that it is a difficult time for a borrower to get a mortgage.

In the third quarter of 2015, 60 percent of the executives believed that home prices will increase in the next 12 months, while 35 percent think they will stay the same. Among the general consumers in August's National Housing Survey, 47 percent said they think home prices will increase and 37 percent believe they will stay the same.

Sixty-one percent of executives in the third quarter of 2015 said they believe the economy is on the right track, while 30 percent believe it is on the wrong track. The shares were almost exactly reversed among respondents to the National Housing Survey in August, with 58 percent saying they think the economy is on the wrong track and 32 percent saying they think it is on the right track.

Eighty-one percent of executives said they think it would be difficult to get a mortgage today, while only 18 percent said they think it would be easy. Among general consumers, however, 55 percent of the August respondents said they think it would be easy to get a home loan and 43 percent said they think it would be difficult.

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