The increase in mortgage rates after the presidential election has made lenders more pessimistic about home loan demand in the coming year, according to a recent survey by Fannie Mae. Respondents suggest that the higher rates will discourage both home buyers and those who might consider refinancing their current mortgage.

The survey polled 155 senior executives at lending institutions after the election to gauge their opinions on the housing market and economy for the fourth quarter of 2016. While lenders indicated that they expect a decrease in government compliance regulation, their profit expectations fell to the lowest point since the survey's debut in March 2014 due to concerns about shifting market trends.

"The survey captured lenders' bearish sentiment driven by the recent surge in mortgage rates – a level of bearishness last seen in the summer of 2013 during the 'Taper Tantrum,'" said Doug Duncan, senior vice president and chief economist at Fannie Mae. "The sudden surge in mortgage rates weighed on expected future purchase and refinance volume. Downbeat production expectations suppressed lenders' profit margin outlook to the worst showing in the survey's short history. Rates could slowly unwind in coming quarters, reversing some of the expected decline in volume. However, the potential normalization of interest rates after a sustained period of strong refinancing volumes presents the biggest business challenge facing mortgage lenders in some time."

According to Freddie Mac, the average commitment rate for a 30-year fixed rate conventional mortgage climbed from 3.54 percent on Nov. 3—five days before the election—to 4.3 percent on Dec. 22.

One-third of respondents said they expect demand for government-sponsored enterprise purchase loans, such as those backed by Fannie Mae and Freddie Mac, to go down in the next three months. This was up from 25 percent in the fourth quarter of 2015. Thirty percent said they believe demand for non-GSE eligible loans will go down in the next three months, up 6 percentage points from the previous year. Thirty-six percent said they expect demand for government sponsored purchase loans to go down over the next three months, 12 percentage points higher than the previous year.

However, lenders were still more likely than in the fourth quarter of 2015 to expect increased activity in GSE eligible and government sponsored purchase loans. Thirty percent expected increased demand for GSE eligible loans, up five percentage points from the previous year, while 26 percent expected more demand for government sponsored loans – 3 percentage points higher than November 2015. Twenty-six percent expected more demand for non-GSE eligible loans, down from 30 percent the year before.

In each type of loan, lenders who expected less activity were most likely to say unfavorable mortgage rates would be to blame. Sixty-seven percent of those expecting a decrease in GSE eligible purchase demand gave this reason, along with 66 percent of those expecting lower demand for non-GSE eligible loans and 56 percent expecting less demand for government sponsored loans. In the fourth quarter of 2015, only about one-third of lenders in each segment cited unfavorable mortgage rates if they expected a decrease in activity.

Approximately two-thirds of lenders in each type of loan expected a reduction in refinance activity in the next three months. Sixty-nine percent said they believe there will be a slowdown in GSE-eligible refinance demand, up 7 percentage points from the previous year. Sixty-eight percent believe refinance demand will slow down for non-GSE loans, while 67 percent expected less demand for refinancing in government sponsored loans. These shares were up 11 percentage points for non-GSE loans and 7 percentage points for government sponsored loans.

Eight percent of lenders said they believe there will be more refinance demand for GSE eligible loans, up 2 percentage points from the previous year. The share of lenders expecting higher refinance demand fell from 6 percent in the fourth quarter of 2015 to 3 percent for non-GSE eligible loans, and from 5 percent to 2 percent for government sponsored loans.

Most lenders anticipated little change to their credit standards in the next three months. Six percent expected an easing of standards for both GSE eligible and government sponsored loans, while 10 percent said they will likely ease their standards for non-GSE eligible loans. Three percent expected tighter credit restrictions for government sponsored loans, while 2 percent anticipated the same trend for non-GSE eligible loans and 1 percent for GSE eligible loans.

For the first time since the fourth quarter of 2015, a net share of lenders expected a decrease in their profit margin in the next three months. Forty-six percent said they anticipated a reduction in profits, while 15 percent expected an increase and 39 percent felt their profit margin would stay about the same.

Among respondents expecting a lower profit margin, 43 percent put the onus on changing market trends, such as a possible shift in demand from refinancing to purchase mortgages. Thirty-nine percent cited competition from other lenders, while 26 percent blamed lower consumer demand.

Government regulatory compliance has typically been the main reason cited by lenders for an expected decrease in their profit margin, with 67 percent of respondents who expected lower profits citing this reason in the survey for the second quarter of 2016. However, the share citing this reason in the fourth quarter fell to a survey low of 18 percent.

Among the lenders expecting higher profit margins in the next three months, 42 percent expected that they would be a result of operational efficiency. Forty percent named changing market trends, while 33 percent said the profits would come from a reduction in staffing.

Despite the concerns about mortgage rates, more lenders said they thought getting a mortgage would not be a challenge. Thirty-four percent said they thought it would be easy to get a mortgage, up from 29 percent in the fourth quarter of 2015. Sixty-five percent said they thought getting a mortgage would be difficult, down 5 percentage points from the previous year.

Sixty-two percent of respondents said they thought the United States economy was on the right track, up from 48 percent in the previous quarter. However, this share was also down 1 percentage point from the fourth quarter of 2015. Twenty-five percent of respondents said they thought the economy was on the wrong track, down from 42 percent in the previous quarter and 29 percent in the previous year.

Fifty-two percent said they believe home prices will go up in the next 12 months, down from 63 percent in the third quarter and 58 percent in the fourth quarter of 2015. Forty-one percent expect home prices to stay about the same, up 11 percentage points from the previous quarter and 2 percentage points from the previous year. Only 6 percent of lenders said they think home prices will decrease, down from 7 percent in the third quarter but up from 3 percent in the fourth quarter of 2015.