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Fannie Mae: Q3 2016 Mortgage Lender Survey Highlights

By Arvin Sahakian · Oct 9, 2016 · Mortgage

Fannie Mae: Q3 2016 Mortgage Lender Survey Highlights

Image courtesy of Fannie Mae, Fannie Mae

Mortgage lenders are optimistic about the future of the home loan mortgage business.

According to Fannie Mae's third quarter Mortgage Lender Sentiment Survey®, mortgage lenders are optimistic about the future of the home mortgage business. Most of this optimism stems from lender expectations of higher profits in the next three months. More on that later in this article.

Fannie Mae's sentiment survey asks questions related to mortgage demand and credit standards across the following three loan types.

  • GSE Eligible Loans: GSE eligible mortgages meet the underwriting guidelines, including loan limit amounts, of the Government-Sponsored Enterprises (GSEs). Fannie Mae and Freddie Mac are GSEs.
  • Non-GSE Eligible Loans: Non-GSE eligible mortgages do not meet GSE guidelines for purchases. These mortgage loans generally require larger down payments and have higher interest rates than GSE eligible mortgages.
  • Government Loans: Government mortgages primarily include Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) insured loans. They also include other programs, such as Rural Housing Guaranteed and Direct loans. Government loans are not included in the GSE eligible and Non-GSE eligible loan categories.

Demand for Purchase Mortgage Loans

As shown in the graph below, the percent of lenders reporting net demand growth for purchase mortgages over the previous three months is about the same as last year at this time for all three loan types. On the graph, the Net Up percentage is the percent of lenders saying demand increased over the past three months minus the percentage of lenders saying demand decreased.

For GSE eligible mortgages, the Net Up was 70% compared to 67% for this time last year. The Net Up for non-GSE eligible loans was 51% compared to 47% a year ago. Finally, the Net Up for government loans was 52% compared to 53% this time last year.

Fannie Mae Survey For Demand For Purchase Mortgage Loans - Past 3 Months

Lender expectations for net demand growth in purchase mortgage remained about the same as expectations levels of a year ago. The Net Up for GSE eligible loans was 22%. That's up about 4% from this time last year. The Net Up for non-GSE eligible loans grew 2% from 17% for 2015's third quarter survey to 19% for this year's third quarter survey. There was a slight 1% drop from 16% to 15% for government loans.

Demand for Refinance Mortgage Loans

Net demand growth for refinance mortgages over the previous three months has shown a gradual upward trend this year reaching a survey high this quarter. The increase over the past three months was likely driven by mortgage rates falling after Brexit. The Net Up for GSE eligible loans shot up from -14% a year ago to 65% this quarter. The Net Up for non-GSE eligible and government loans steadily climbed from -15% for each last year at this time to 47% for non-GSE and 48% for government refinances.

Lender expectations for net demand growth over the next three quarters are much higher than their expectation levels of a year ago as shown in the graph below. The Net Up for GSE eligible loans was 6%. That's up 43 percentage points from the Net Up of -37% reported on 2015's third quarter survey. Similar Net Up growth is seen for non-GSE eligible and government loans.

The Net Up for non-GSE eligible loans grew from last year's -31% to this year's -3%. Likewise, the Net Up for government loans grew from -33% to -4%. Lender expectations for net demand growth are similar to expectations reported during the second quarter of this year.

Fannie Mae Survey For Demand For Refinance Mortgage Loans - Next 3 Months

Credit Standards

Mortgage lending executives continue to report net easing of credit standards. However, the share of lenders reporting net easing has gradually trended down after reaching its survey high during the third quarter of 2015 as the graph below shows. On the Credit Standards graphs, the Net Ease percentage equals the percent of lenders who say they have eased credit standards minus the percent who say they have tightened them.

The Net Ease for the past three months is 12% for GSE eligible loans compared to last year's 20%. A similar drop occurred for Non-GSE eligible loans where last year's Net Ease percentage of 18% fell 12 points to 6% for this year's third quarter survey. The Net Ease for government loans was flat at 8% for both third quarter this year and last.

Fannie Mae Survey For Credit Standards For Mortgage Loans - Past 3 Months

Lender expectations for easing of credit standards over the next three months is relatively flat. The Net Ease for GSE eligible loans shows a slight drop from 7% last year to 5% this year. A slightly larger drop appeared for the Net Ease for non-GSE eligible loans. Last year's third quarter percentage was 10% while this year's percentage is 4%. Finally, a slight uptick from -1% to 1% occurred for government loans.

Profit Margin Outlook

Lenders reported a net positive profit margin outlook for a third-straight quarter, which represents a significant increase over this time last year. Of the mortgage executives surveyed in August, 28 percent expect an increase in loan profits while only 17 percent expect a decrease. That's an improvement over last August's survey when 13 percent of executives expected an increase in profits and 38 percent expected a decrease.

Lender expecting increased profit margins point to higher operational efficiency and rising consumer demand. Those expecting decreased profit margins point to market competition and government regulatory compliance. The survey shows that lenders may be finally adapting to federal regulations. About 39% of lenders included government regulatory compliance as one of the top two reasons for their decreased profit margin outlook. That's a survey low dropping from 67% last quarter and 61% during the third quarter of 2015.

Expected Home Prices in the Next 12 Months

Throughout 2016, home prices have been climbing to their highest level since 2007 according to The Mortgage Reports. However, 62% of U.S. home are still affordable for typical buyers because of low mortgage rates. New 3-year lows in mortgage rates were set during the second quarter of 2016 coming very close to the record all-time lows set in November 2012.

Despite rising home prices this year, Bloomberg reports that Chris Flanagan of Bank of America Corp. predicts that housing prices will fall by 1.7 percent in 2017. Flanagan states, "We do not see income growing fast enough to keep up with the past few years of rapid increases in home prices."

Bottom Line

With housing prices predicted to fall in 2017 and low interest rates, consumer demand for both purchase and refinance mortgages should continue to grow. Reported operational efficiencies along with this increased demand bodes well for mortgage lenders as evident from the results of this quarter's Mortgage Lender Sentiment Survey®

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