Although a majority of respondents in Fannie Mae's year-end Mortgage Lender Sentiment Survey were optimistic about the American economy and the likelihood that home values will continue rising, they were also likely to say they have seen a slowdown in mortgage demand and expect lower profit margins to start off 2018.

For the fifth consecutive quarter, lenders were more likely to report that they expect a decrease in their profit margin over the next three months rather than an increase. Those who said they expected their profit margins to go down were most likely to cite competition as a factor.

"This is not surprising given that refinance volume continues to shrink," said Doug Duncan,  senior vice president and chief economist at Fannie Mae. "More lenders reported a pullback in refinance demand from the prior quarter than those who saw an increase, continuing the trend that started at the beginning of the year. This finding is consistent with our forecast for a steady drop in refinance originations this year. With the outlook calling for rising interest rates and continued tight housing inventory constraining home sales, increased competition will likely continue to drive lenders' mortgage business strategies."

A net share of 44 percent of respondents said they have seen a decrease in demand for GSE eligible refinance loans, or mortgages backed by government sponsored enterprises like Fannie Mae and Freddie Mac, in the past three months. This was down sharply from the fourth quarter of 2016, when a net share of 41 percent said GSE eligible refinance mortgage demand was up.

Similar trends occurred for non-GSE eligible loans and government backed refinance loans, with net shares of 43 percent and 52 percent, respectively, reporting a drop in demand. In the last quarter of 2016, 26 percent on net reported an increase in non-GSE eligible refinance mortgage demand and a net share of 20 percent said that government backed refinance mortgage demand was up.

Few lenders expected refinance demand to pick up in the beginning of the year. On net, 51 percent said they think demand will go down for government backed refinance loans in the next three months. Net shares of 47 percent and 40 percent expected a decline in GSE eligible and non-GSE eligible refinance mortgage demand, respectively.

Lenders were still more likely than not to say purchase mortgage demand was up at the end of the year, but the net shares reporting an increase in demand were at their lowest point in three years. Respondents were more likely to believe demand for this type of loan will decrease at the beginning of the year, but responses were consistent with the fourth quarters of previous years.

A net share of 11 percent said GSE eligible purchase mortgage demand was up in the past three months, down from 45 percent in the last quarter of 2016. A net share of 19 percent said non-GSE eligible purchase mortgage demand was up, while 4 percent said they had been an uptick in government backed purchase mortgage demand.

In the next three months, a net share of 7 percent of lenders believe demand for government backed purchase mortgages will go down while a net share of 4 percent expect demand for GSE eligible purchase mortgages to decrease. Respondents were evenly split on whether they think non-GSE eligible purchase mortgage demand will increase in the first quarter of 2018.

The share of respondents saying they have eased credit standards in recent months hit a survey high for the second consecutive quarter. A net share of 25 percent said they had eased standards for GSE eligible loans in the past three months, along with 20 percent who did so for non-GSE eligible loans and 16 percent who did so for government backed loans. A net share of 9 percent said they expect to continue easing credit standards for government backed loans in the next three months, along with 8 percent who plan to do so for non-GSE eligible loans and 7 percent who expect to ease standards on GSE eligible loans.

A net share of 22 percent of lenders said they think their profit margins will go down in the next three months, up from 12 percent in the previous quarter but down from 31 percent at the end of 2016. Thirty-eight percent said they think their profit margins will shrink, while 16 percent said they think they will increase.

Three-quarters of lenders who believe their profit margins will go down said they expect competition from other lenders to cut into their earnings. Thirty percent cited decreased consumer demand and 29 percent named personnel costs as the reason for this expectation.

Among those who expect their profits to go up, 62 percent expect operational efficiency to boost their revenues. Thirty-six percent said pricing and policies for GSE eligible loans may lead to increased profits, and 34 percent cited market trends.

Eighty-nine percent of respondents said they think the economy is on the right track, up from 62 percent in the previous year. Five percent said they think the economy is on the wrong track, a year-over-year drop of 20 percentage points. By comparison, Fannie Mae's National Housing Survey—which polls the general public each month—found that half of all respondents in November thought the economy was on the right track while 38 percent thought it was on the wrong track.

Sixty-nine percent of lenders said they think home prices will increase in the next 12 months, up from 52 percent in the fourth quarter of 2016. The share who believe prices will fall held at 6 percent. Among the general public, 53 percent said they think home prices will go up while 7 percent said they believe they will go down.

An increasing number of lenders said they thought it was easy to get a mortgage, with 46 percent holding this opinion – up 12 percentage points from the previous year. Fifty-four percent said they thought it would be difficult to get a mortgage, down from 65 percent in the previous year. Among the general public, 59 percent thought it would be easy to get a mortgage and 38 percent thought it would be difficult.

Fannie Mae's Mortgage Lender Sentiment Survey is issued quarterly to the senior executives at a number of lending institutions. The survey for the fourth quarter of 2017 included responses from 196 individuals.