Lenders expect to see more refinancing, greater profits

A record share of mortgage lenders said they expect to see greater profits in the near future, according to the latest Mortgage Lender Sentiment Survey by Fannie Mae. Lenders were most likely to credit a renewed interest in refinance mortgages for the rosy outlook.

In the survey for the third quarter of 2019, 53 percent said they expect their profit margin to increase in the next three months while 13 percent expect it to decrease. The net share of 40 percent with a positive outlook marked a survey high, up from a net share of 29 percent in the second quarter of the year. The two quarters of anticipated profit growth follow 10 straight quarters where lenders were more likely to expect lower profit margins in the coming months.

Sixty-one percent of lenders who said they expect increased profits cited consumer demand, while 43 percent said operational efficiency will boost their profits and 22 percent said market trend changes will work in their favor. Among the lenders expecting lower profits, two-thirds said they expect competition from other lenders to cut into their profits while 28 percent cited the pricing and policies of government-sponsored enterprises and 21 percent said higher personnel costs will shrink their profits.

"Many lenders pointed to declining interest rates as the engine behind consumer demand, particularly for refinance mortgages," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Together, the results suggest that lenders' positive profitability outlook is being driven primarily by business fundamentals, not by lowered credit standards."

According to Freddie Mac, mortgage rates have dropped steadily from a recent high of nearly 5 percent in November 2018 to about 3.5 percent. While lenders have typically reported depressed refinance activity since late 2016, they also noted a surge of renewed interest this year.

A net share of 81 percent said demand for GSE eligible mortgages has increased in the past three months. These loans meet the underwriting requirements for government-sponsored enterprises such as Fannie Mae and Freddie Mac. A net share of 62 percent said there has been higher demand for non-GSE eligible refinance mortgages while 60 percent said there is more demand for government-backed refinance mortgages.

Most lenders expect this demand to continue in the next three months. Net shares of 59 percent reported this expectation for GSE eligible refinance mortgages, along with 44 percent for non-GSE eligible and 43 percent for government refinance mortgages.

Respondents also reported higher demand for purchase mortgages. A net share of 67 percent said demand had gone up for GSE eligible loans in the past three months, with a net share of 34 percent expecting it to continue in the next three months. For non-GSE eligible purchase mortgages, net shares of 53 percent said they had seen greater demand in recent months and 22 percent said they expect it to continue. A net share of 50 percent said there had recently been higher demand for government purchase mortgages, with a net share of 27 percent saying they expect more demand in the next three months.

Lenders were less likely to ease their credit standards. A net share of 9 percent said they had done so in the past three months for non-GSE eligible loans. Conversely, a net share of 5 percent said they had tightened credit standards for government loans while a net share of 3 percent had done so for GSE eligible loans.

In the next three months, a net share of just 1 percent of lenders said they expect to ease credit standards for non-GSE eligible loans. A net share of 7 percent said they think they will tighten credit standards for government loans, while a net share of 3 percent expect to do so for GSE eligible mortgages.

Sixty percent of lenders said they think it would be easy for a borrower to qualify for a mortgage, up from 52 percent in the third quarter of 2018. Forty percent said they thought it would be difficult for a borrower to qualify, a year-over-year drop of 7 percentage points.

Forty-seven percent said they think home prices will go up in the next 12 months, down 14 percentage points from the previous year. Twelve percent said they think home prices will go down, up from 9 percent in the third quarter of 2018.

Eighty-one percent said they consider the U.S. economy to be on the right track, inching down from 83 percent in the third quarter of 2018. Fourteen percent said they consider the economy to be on the wrong track, a year-over-year increase of 6 percentage points.

Fannie Mae's Mortgage Lender Sentiment Survey for the second quarter of 2019 was based on interviews with top executives at 179 mortgage lenders.

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