Written By: Joel Palmer, Op-Ed Writer
Despite weakening mortgage demand and negative profit forecasts, fewer mortgage lenders are loosening their credit standards, according to a recent Fannie Mae survey.
Fannie Mae’s Q3 2018 Mortgage Lender Sentiment Survey showed that lenders generally have a net negative profit margin outlook.
According to the survey, lenders that expect decreased profit margins outweigh those anticipating increases for the eighth consecutive quarter.
“Lenders continued their bearish trend this quarter, as they note ongoing anemic refinance activity and the worst purchase mortgage demand for a third quarter in the survey's history, said Doug Duncan, senior vice president and chief economist at Fannie Mae.
The survey cited lender competition as the top reason why profit margins are expected to decline. The second reason was lower consumer demand.
“For the first time this year, consumer demand was one of the top two reasons for the downbeat profit outlook, cited by more than one-third of lenders—a record high,” said Duncan.
The reasons that consumer demand rates high is because of the continuing decline in purchase mortgages. Purchase mortgage growth over the previous three months and anticipated growth over the next three months reached its lowest level since the survey was launched in 2014.
Despite the anticipated decline in demand and profits, lenders don’t anticipate loosening credit standards to create more demand. This is especially true for GSE-eligible and government program mortgages.
“This may suggest the realization among lenders that combating declining affordability by making it easier to obtain mortgages might not be the answer – or simply that there is little room for additional easing going forward,” said Duncan.
That’s a departure from a year ago, when 26 percent of survey participants said they had eased credit standards in the previous three months and 18 percent anticipated doing so in the following three months for GSE eligible loans.
During this survey, only 12 percent of respondents said they eased credit standards for GSE eligible loans the previous three months. And only 9 percent anticipate doing so over the next three months.
Earlier this year, much of the talk among mortgage processors and underwriters was about loosening standards.
The housing crisis of 2008 was blamed in large part to lose mortgage lending standards. Credit standards were subsequently tightened. As the economy has improved, government agencies, government sponsored enterprises (GSEs) and mortgage lenders have attempted to make mortgage loans more accessible while trying to avoid the mistakes of the previous decade.
Some argue that credit standards are still too tight. Other signs point to them becoming too lenient again and potentially leading to a repeat of the housing crisis.
The Urban Institute’s Housing Credit Availability Index reached its highest level since 2013 during the first quarter of 2018. The index measures the percentage of home purchase loans that are likely to default, which provides an indication of mortgage loan accessibility; the lower the index, the tighter the lending standards and the more difficult it is to obtain financing.
In addition, a move to accept higher debt-to-income (DTI) ratios — from 45 percent to 50 percent — forced Fannie Mae to alter its underwriting guidelines. That’s because in the fourth quarter of last year, 20 percent of Fannie’s mortgage acquisitions had a DTI higher than 45 percent. For all of 2017, the number was 10 percent. For the full year of 2016, only 5 percent of Fannie’s mortgage purchases had a 45-percent or higher DTI.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.