Lenders Loosen Mortgage Standards, as Demand Falls

by Wolf Richter, Wolf Street:

Same phenomenon leading up to the last housing bust?

The toxic combination of “competition from other lenders” and slowing mortgage demand is cited by senior executives of mortgage lenders as the source of all kinds of headaches for the mortgage lending industry.

Primarily due to this competition amid declining of demand for mortgages, the profit margin outlook has deteriorated for the fourth quarter in a row, according to Fannie Mae’s Q3 Mortgage Lender Sentiment Survey. And the share of lenders that blamed this competition as the key reason for deteriorating profits “rose to a new survey high.”

Demand is down for all three types or mortgages:

  • Mortgages eligible for guarantees by Government Sponsored Enterprises, such as Fannie Mae and Freddie Mac (“GSE Eligible”), indirectly backed by taxpayers.
  • Mortgages not eligible for GSE guarantees (“Non-GSE Eligible”), not backed by taxpayers
  • Mortgages guaranteed by Government agencies, such as Ginnie Mae, directly backed by taxpayers.

The survey, conducted quarterly, tallied responses from senior executives at 190 mortgage lenders, from the largest banks to smaller specialty lenders, “to assess their views and outlook across varied dimensions of the mortgage market.”

These executives reported that demand over the past three months has dropped year-over-year for purchase mortgages, “reaching the lowest third-quarter reading in the past two years”:

US-housing-mortgage-demand-Q3.png

Lenders also reported declining demand in refinance mortgages: “Overall, the refinance market remains a stark contrast from a year ago, when the net share reporting rising demand over the prior three months hit a survey high.”

And how are lenders combating this lack of demand and the deteriorating profit margins that are being pressured by competition? They’re loosening lending standards.

Fannie Mae’s report:

Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016. In particular, both the net share of lenders reporting easing on GSE-eligible loans for the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs.

Lenders’ comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans.

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