Mortgage lenders indicated that they have rapidly tightened their credit standards in response to the COVID-19 pandemic, according to the Mortgage Lender Sentiment Study by Fannie Mae. For the first time in this survey's history, respondents were more likely to have an unfavorable view of the U.S. economy than a favorable one. However, lenders were also more likely to maintain a favorable outlook on their profit margins, with a majority anticipating an uptick in refinance mortgage applications.

In the survey for the second quarter of 2020, a record low share of lenders said they have eased credit standards. A net share of 52 percent said that in the past three months they have tightened credit standards for mortgages eligible for backing by government-sponsored enterprises, such as Fannie Mae and Freddie Mac. A net share of 64 percent said they had tightened standards for non-GSE eligible mortgages, while 61 percent on net said they had done so for government-backed mortgages.

A net share of 44 percent said they expect to continue tightening credit standards for non-GSE eligible mortgages in the next three months. A net share of 29 percent said they believe they will do so for GSE eligible loans while a net share of 28 percent anticipated further restrictions for government-backed loans.

Nearly all lenders said the decrease in mortgage rates has produced a higher demand for GSE eligible refinance mortgages. A net share of 46 percent said they expect this demand to continue in the next three months.

Sixty-two percent on net said there has been more refinance activity for government-backed mortgages in the past three months, with a net share of 46 percent saying non-GSE eligible mortgage activity has increased. Net shares of 18 percent and 7 percent said they believe refinance activity will increase for government and non-GSE eligible loans, respectively.

"Lenders' profitability outlook remains positive, likely because of stable refinance demand, lender capacity constraints, and still-wide mortgage spreads," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Nevertheless, challenges remain as the uncertainty around COVID-19 persists, in particular for mortgage servicing."

Fifty-two percent of lenders said they expect to see their profit margins increase in the next three months. Fifty-five percent of those who held this view said they anticipate greater consumer demand, while 33 percent cited GSE pricing and policies and 28 percent said they think they will face less competition from other lenders.

Twenty-three percent said they anticipate a decrease in profit margins in the next three months. Forty-one percent of these respondents said they expect to see more competition from other lenders, while 34 percent said they think GSE pricing and policies will cut into their profits and 27 percent said they anticipate less consumer demand.

The pandemic had little effect on GSE eligible purchase mortgages. A net share of 2 percent of respondents said this demand has decreased in the past three months, while a net share of 4 percent said they expect an increase in GSE eligible purchase mortgage demand in the next three months.

However, a net share of 34 percent said there has been less demand for non-GSE eligible mortgages in the past three months, with a net share of 25 percent saying they expect this decline in demand to continue. A net share of 24 percent said demand for government-backed loans has decreased in the past three months, with a net share of 10 percent expecting demand to decrease further.

"Lenders attributed the purchase mortgage demand decline to COVID-19-related factors, including home price uncertainty, higher unemployment, policy changes, and lower inventory," said Duncan. "Lenders pointed to the same reasons for credit tightening."

Fifty-four percent said they consider the economy to be on the wrong track, shooting up 42 percentage points from the second quarter of 2019. Thirty percent said they consider the economy to be on the right track, a year-over-year drop of 54 percentage points.

The Fannie Mae Mortgage Lender Sentiment Survey for the second quarter of 2020 was conducted between May 5 and 18. It collected responses from 254 senior executives at 229 lending institutions.