Although purchase mortgage demand in the United States in the third quarter of 2016 showed relatively little change from the previous year, lenders noted that there was a surge in demand for refinancing. Lenders were also more likely to expect higher profit margins as they became less concerned about regulatory hurdles.

Fannie Mae conducted its latest Mortgage Lender Sentiment Survey in August. This survey polled 219 senior executives who represented 200 lending institutions.

Seventy-five percent of lenders said the demand for purchase mortgages eligible for backing by a government-sponsored enterprise—such as Fannie Mae or Freddie Mac—increased in the three months prior to the survey. Fifty-eight percent said demand for non-GSE eligible loans increased in the previous three months, while 62 percent said demand for government-backed loans was up. Each share deviated from the third quarter of 2015 by only one or two percentage points.

Lenders also expect little change in demand in the next three months. Thirty-four percent said they expect demand for GSE eligible loans to increase, down 3 percentage points from the previous year. Thirty-three percent expect demand for non-GSE eligible loans to go up, a year-over-year decrease of 1 percentage point. Thirty percent believe demand for government-backed loans will go up, a drop of 4 percentage points from the third quarter of 2015.

By contrast, refinance activity was up sharply from the previous year. Seventy-two percent of lenders said demand for GSE eligible mortgages had increased in the past three months, up from 28 percent in the third quarter of 2015. Fifty-five percent said non-GSE eligible refinance mortgage demand had gone up, an increase of 32 percentages points. Fifty-seven percent said demand for government-backed refinance mortgages had gone up, an increase of 33 percentage points from the previous year.

The net demand growth in refinance mortgage activity was a new survey high. Fannie Mae credited this shift in demand to the British vote to exit the European Union, which helped drive low mortgage rates even lower.

Fewer lenders believe this demand will continue into the fourth quarter of the year. Twenty-eight percent expect demand for GSE eligible refinance mortgages to go up in the next three months, up from 10 percent in the third quarter of 2015. Nineteen percent said they expect non-GSE eligible mortgage refinance demand to climb, a year-over-year increase of 10 percentage points. Twenty percent believed demand for government-backed mortgage refinances will increase, up 9 percentage points from the third quarter of 2015.

Although lenders reported a modest easing of credit standards, this share was down from a record high in the third quarter of 2015. Fifteen percent said they had eased credit standards for GSE eligible mortgages in the past three months, a year-over-year drop of 8 percentage points. Fourteen percent reported an easing of standards on non-GSE eligible loans, a decrease of 8 percentage points. Fourteen percent had eased credit standards for government-backed loans, up 1 percentage point from the previous year.

Expectations for the easing of credit standards have fallen gradually since the last quarter of 2015. In the third quarter of 2016, 9 percent of lenders said they expect to ease credit standards on both GSE eligible and non-GSE eligible mortgages in the coming three months. Six percent said they will likely ease credit standards for government-backed mortgages.

The share of lenders expecting a better profit margin rose significantly from the previous year. Twenty-eight percent said they expect their profit margin to increase in the next three months, up from 13 percent in the third quarter of 2015.

The majority of these lenders—54 percent—said they expect their profit margin to increase due to operational efficiency. Forty-nine percent said they thought consumer demand will help increase their profits. Other reasons for the expected increase in profit margins included changes in market trends (27 percent), GSE pricing and policies (17 percent), and a reduction in personnel costs (14 percent).

Fifty-five percent of lenders said they expect their profit margin to stay about the same, up from 49 percent in the previous year. The share of lenders expecting a decrease in their profit margin fell from 38 percent in the third quarter of 2015 to 17 percent.

Forty-six percent said they thought competition from other lenders would cut into their profits, while 39 percent cited government regulatory compliance. Other reasons for the expected decrease in profits included personnel costs (31 percent), market trend changes (23 percent), and consumer demand (21 percent).

This result marked the first time in the survey's history that government regulatory compliance was not the top reason cited by lenders for an expected drop in profits. In the third quarter of 2015, 61 percent of lenders who expected a decrease in profit cited this reason.

"It appears that lenders have incurred the increased compliance costs from new regulations such as TRID, and are now on a stabilized though higher cost footing to focus on growth strategies," said Dough Duncan, senior vice president and chief economist at Fannie Mae. "However, any upward move in interest rates will bring reduced origination volumes and competitive pressure on profits. That pressure would likely result in lowered expectations and additional demands for cost containment."

Lenders have traditionally been more optimistic about the U.S. economy than the general public, whose opinions are gauged each month in Fannie Mae's National Housing Survey. However, they were more uncertain in the third quarter of 2016.

Forty-eight percent of lenders said they considered the economy to be on the right track, down from 61 percent in the third quarter of 2015. Forty-two percent said they considered the economy to be on the wrong track, a year-over-year increase of 12 percentage points. In the National Housing Survey for August, 38 percent of 1,000 respondents from the general public said they thought the economy was on the right track and 52 percent said they thought it was on the wrong track.

Sixty-three percent of lenders said they believe home prices will rise in the next 12 months, up 3 percentage points from the previous year. Seven percent thought prices will go down, up from 2 percent in the third quarter of 2015.

Seventy-two percent of lenders said they thought it was difficult for a consumer to get a mortgage, down from 81 percent in the third quarter of 2015. The share of lenders who thought it was easy to get a mortgage climbed 10 percentage points to 28 percent.