Lenders report reduced mortgage demand in latest Fannie Mae survey

Demand for purchase mortgages was down for the first time in nearly four years to start off 2018, according to the latest Fannie Mae Mortgage Lender Sentiment Survey.

Lenders also reported that demand for refinance mortgages remained low, with few expecting it to pick up in the second quarter of the year. For the sixth consecutive quarter, lenders were more likely than not to expect reduced profit margins.

"Lenders have faced an increasingly difficult market environment, as they report the most sluggish refinance demand expectations in more than a year, the most anemic purchase demand outlook on record for any first quarter, and the worst profit margin outlook in the survey's history," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Despite the pressures to remain competitive and profitable, signs of lender caution appear to be emerging. While more lenders eased lending standards than tightened them, continuing the trend that started more than three years ago, the net share of lenders reporting easing credit standards declined for the first time in five quarters to the lowest level in a year."

A net share of 9 percent of lenders reported a decrease in demand over the previous three months for purchase mortgages backed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. This was down from the first quarter of 2017, when a net share of 10 percent of lenders said demand for this type of loan was up.

Lenders were equally split on whether demand for non-GSE eligible loans had increased over the past three months. Fourteen percent on net said demand for government-backed purchase mortgages had decreased.

The net share of lenders reporting a recent increase in purchase mortgage demand was negative for the first time since the first quarter of 2014, and also at its lowest point since this quarter.

Looking ahead to the next three months after the survey, lenders were more optimistic. A net share of 38 percent expected an increase in purchase mortgage demand for GSE eligible loans, along with 35 percent who believed non-GSE eligible purchase mortgage demand will go up and 31 percent who expected an increase in government-backed purchase mortgage demand. However, the net share of lenders expecting purchase mortgage loan demand to increase was also at its lowest point of all first quarters in the survey's history.

Refinance mortgage demand continued to ebb, continuing a trend that began in the first quarter of 2017. On net, 54 percent said they had seen diminished refinance mortgage demand in the previous three months for both GSE eligible and government-backed loans, while 48 percent reported a drop in non-GSE eligible refinance mortgage demand.

Lenders did not expect an upswing in this market to start 2018. A net share of 59 percent said they expect less demand for government-backed refinance mortgages, along with 54 percent who believe GSE eligible refinance demand will go down and 51 percent who expect less demand for non-GSE eligible refinance mortgages.

Although lenders were more likely to report an easing of credit standards over the past year, with a record high saying they had taken this action in the third quarter of 2017, lenders were more likely to tighten standards at the end of the year. In the fourth quarter, a net share of 12 percent said they had eased standards for GSE eligible loans, along with 10 percent who had done so for non-GSE eligible loans and 9 percent who had taken this action for government backed loans.

In the next three months, a net share of 6 percent of lenders said they expect to ease credit standards for GSE eligible or government-backed loans. A net share of 9 percent said they would likely take this action for non-GSE eligible loans.

Forty-eight percent of lenders said they think their profit margin will decrease in the next three months, while 17 percent expected it to increase. The net share of 33 percent of lenders anticipating a reduction in profits matched a survey low set in the fourth quarter of 2016.

More than three-quarters of respondents—78 percent—cited competition from other lenders as the main reason for a likely reduction in their profits, a new survey high. Thirty-five percent said market changes were to blame, while 22 percent expected reduced consumer demand to affect their profits.

Among the lenders who believe their profit margin will grow, 43 percent said operational efficiency would help them save money and 41 percent said market trends will likely favor them. Thirty-four percent cited consumer demand.

Despite the expectations for lower profits, most lenders held a favorable view of the United States economy. Eighty-five percent considered the economy to be on the right track, up from 77 percent in the first quarter of 2017. Ten percent said they thought the economy was on the wrong track, down from 11 percent in the previous year.

Sixty-nine percent of lenders said they think home prices will continue to climb, down 7 percentage points from the previous year. Seven percent believe prices will go down, up from 6 percent in the first quarter of 2017.

A greater share of lenders considered the mortgage process to be favorable to buyers, with 52 percent saying it would be easy for them to get a mortgage and 46 percent who considered it to be difficult. In the first quarter of 2017, 65 percent of lenders thought it would be difficult for buyers to get a mortgage and 35 percent thought it would be easy.

Fannie Mae's Mortgage Lender Sentiment Survey was issued between Feb. 7 and Feb. 19. A total of 196 senior executives at U.S. lending institutions were polled for the survey.

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