Fannie Mae study finds that mortgage lenders are easing standards

Fannie Mae’s latest Mortgage Lender Sentiment Survey revealed that an increasing number of mortgage lenders have eased credit standards in the second quarter of 2017 and expect further easing in the coming months.

The report found that the share of lenders reporting they have eased mortgage credit standards over the prior three months has ticked up gradually since the fourth quarter of 2016. Additionally, when anticipating the next three months, the net share of lenders saying they plan to ease credit standards for government-sponsored entity (GSE) eligible, non-GSE eligible, and government loans reached or surpassed survey highs this quarter.

Concerns regarding economic conditions were a top driver for changes in lending standards. Across the three loan types, the share of lenders who reported growth in purchase mortgage demand dropped to the lowest net reading in years for the second-quarter period. The results mirror the ongoing narrative for housing: Tight inventory has pushed up home prices, which is weighing on affordability and constraining sales.

“Expectations to ease credit standards climbed to survey highpoints in the second quarter as more lenders reported slowing mortgage demand and increasing concerns about competition from other lenders,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said. “Lenders cited additional contributing factors such as diminishing compliance concerns and more support from the GSEs, including clarification on representations and warranties and tools that provide greater certainty during the loan underwriting process.”

Easing credit standards might also be the result of increased pressure to compete for declining mortgage demand, Duncan added.

“For the third consecutive quarter, the share of lenders expecting a decrease in profit margin over the next three months exceeded the share with a positive profit margin outlook,” he said. “For the former, the percentage citing competition from other lenders as a reason for their negative outlook reached a survey high.”

The net share of lenders reporting a negative profit margin outlook has also declined since reaching the survey’s worst reading in Q4 2016. However, more lenders reported a negative outlook than a positive outlook. Mid-sized institutions are most likely to expect a net decrease in profit margin, while larger institutions are more likely to expect an net increase in profit margin.

Further, concern about competition from other lenders set a new survey high this quarter across all profit-margin drivers, cited as the key reason for lenders’ decreased profit margin outlook.

The perceived impact of “government regulatory compliance,” which declined sharply in the fourth quarter of 2016, has remained low the past three quarters relative to most of the prior two years’ readings.