Lenders report more robust purchase mortgage demand

Mortgage lenders indicated that they expect to see more demand for purchase mortgages in 2020, according to the findings of the fourth quarter Mortgage Lender Sentiment Survey from Fannie Mae. However, lenders also said they don't expect to see much change in demand for refinance mortgages, leading to relatively steady expectations on profit margins.

A net share of 62 percent of respondents said they have seen greater demand for GSE eligible purchases—which are underwritten by government-sponsored enterprises like Fannie Mae—in the past 12 months. Sixteen percent on net said they expect to see more GSE eligible purchase demand in the next three months.

Net shares of 55 percent and 44 percent said they have seen recent heightened demand for non-GSE eligible and government-backed home loans, respectively. A net share of 11 percent said they anticipate more demand for both types of loans in the next three months.

The results were a marked change from the fourth quarter of 2018. At that point, a net share of lenders reported less demand for all loans except non-GSE eligible ones and were more likely than not to expect diminished demand in the near future.

Lower rates have helped drive demand for refinance mortgages. After several quarters of lenders reporting less demand for this type of loan, they began reporting increased interest in the middle of the year.

A net share of 90 percent said there has been greater demand for GSE eligible refinance mortgages in the past three months. The share stood at 68 percent for non-GSE eligible refinance mortgages and 69 percent of government refinance loans.

Lenders were unlikely to expect this demand to continue in the next three months, however. A net share of just 1 percent said they think GSE eligible refinance mortgage interest will increase in the near future. Net shares of 11 percent and 4 percent said they expect decreased demand for government and non-GSE eligible refinance mortgages, respectively.

"Lower interest rates, which drove the refinance boom, have been the engine driving mortgage demand growth this year," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Lenders' purchase and refinance demand expectations align with our own forecast: With interest rates stabilizing in 2020, we expect a decline in refinance activity and slightly higher purchase activity."

The relatively stable market meant lenders were making few changes to their credit standards. They were most likely to ease standards for non-GSE eligible loans, with 11 percent saying they had done so in the past three months. Lenders were also unlikely to tighten credit standards, with between 4 and 6 percent doing so in the past three months or indicating that they will likely do so in the first quarter of 2020.

Following two quarters where lenders were significantly more likely to anticipate a higher short-term profit margins, 44 percent of respondents said they believe their profits will stay about the same. Twenty-eight percent said they think their profits will decrease in the next three months, while 27 percent expect their profits to increase.

Among those who believe they will have a lower profit margin, 63 percent said they believe competition from other lenders will cut into their profits; 39 percent cited market trend changes, while 36 percent said they expect less consumer demand. Fifty-five percent of those who said they expect higher profits cited consumer demand, while 49 percent said they believe they will be bolstered by operational efficiency and 27 percent said they think market trend changes will work in their favor.

Lenders in the survey are also asked some of the same questions posed to the general public in Fannie Mae's monthly National Housing Survey. Sixty percent said they think it is easy for consumers to get a mortgage today, up 8 percentage points from the previous year. Forty percent said they think it is difficult for buyers to qualify for a mortgage, a year-over-year drop of 7 percentage points.

Forty-four percent said they think home prices will rise in the next 12 months, up from 33 percent in the fourth quarter of 2018. Nine percent said they think prices will drop, down 16 percentage points from the previous year.

Seventy-six percent considered the U.S. economy to be on the right track, down 4 percentage points from the previous year. Seventeen percent said they think the economy is on the wrong track, a year-over-year increase of 3 percentage points.

Fannie Mae's Mortgage Lender Sentiment Survey polls senior executives at a variety of lending institutions each quarter. The survey for the fourth quarter of 2019 collected responses from 168 institutions.

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