Rising competition and lower demand for home financing signal tough times ahead for the U.S. mortgage industry, according to Fannie Mae.
U.S. mortgage lenders are aggressively easing mortgage credit standards for a bigger share of the dwindling home financing market, Fannie Mae’s latest quarterly survey finds.
The Mortgage Lender Sentiment Survey showed that a growing share of lenders say they have relaxed credit standards over the past three months, a trend that has gradually intensified since the fourth quarter of 2016. Looking ahead to the next three months, the net share of lenders saying they expect easing for GSE eligible and government loans reached new survey highs in the second quarter. Meanwhile, the proportion of lenders expecting easing for non-GSE eligible loans reached the highest level since the second quarter of 2014.
Basically, mortgage lenders are making it easier for consumers to acquire loans as affordability challenges have pushed more buyers to the sidelines. Home prices are on a sharp upward trajectory thanks to an inadequate supply of property on the market.
The survey also found that worries over the economy were the top motivator for changes in lending requirements. Fannie Mae said this was consistent with the monthly Home Purchase Sentiment Index, where fewer consumers are reporting that now is a good time to buy a home.
At the same time, lenders’ profit outlook improved even as more respondents indicated a negative outlook than a positive one. Larger mortgage lenders are more likely to expect net growth in profit margin, whereas mid-sized institutions are more likely to report a net decrease.
A total of 184 mortgage executives responded to the survey, which was launched in March 2014.
Home sales rebounded in May – the month with the latest available data – even as the median sales price climbed to record highs. However, higher sales were eclipsed by a sharp slowdown in housing construction, a sign that low inventories will continue to pressure the market. Housing starts tumbled 5.5% in May while building permits fell 4.9%.
Long-term rates on fixed residential mortgages edged up seven basis points to 4.03% last week, according to Freddie Mac. Mortgage rates have spent the majority of 2017 above the 4% threshold and could rise to 5.5% by the end of 2018, according to property economist Matthew Pointon of Capital Economics. That could tack on an extra $3,000 per year in mortgage payments for consumers with a $250,000 fixed-rate mortgage.
That’s not a small amount for the average consumer struggling to boost their wages. Weak earnings have been a chronic issue during the recovery. The combination of rising mortgage costs, more expensive homes and meager earnings growth are expected to place further downward pressure on affordability.
Another factor to consider is the percentage of homeowners already in “lockdown mode”. As rates rise, borrowers are going to be less willing to give up their existing deals for higher rates. More than half of economists polled by Zillow say that “mortgage rate lock-in” is already a thing as consumers put off the possibility of a move or a cash-out refinance.
 North Star Funding. “Falling Demand, Competition, Push Lenders Toward Easing Standards.”
 Katie Penote (June 26, 2017). “As Mortgage Demand Cools and Competition Heats Up, More Lenders Are Planning to Ease Credit Standards.” Fannie Mae.
 Annalyn Kurtz (March 13, 2017). “2 Ways the Fed Could Crush the Housing Market Recovery.” Fortune.