Mortgage Demand Falls to Three-Year Low

Mortgage lenders reported a net negative profit margin outlook for the seventh consecutive quarter, as rising home prices and tight housing supply continue to put a squeeze on mortgage demand, according to Fannie Mae’s Q2 2018 Mortgage Lender Sentiment Survey^®. When asked about consumer demand for GSE eligible and government loans, the net share of lenders reporting growth in the past three months – as well as the net share reporting growth expectations looking ahead the next three months – dropped to the lowest reading for any second-quarter period within the past three years. Demand for refinance mortgages fared no better amid rising mortgage rates. On net, more lenders reported declining refinance demand over the prior three months, reaching the lowest level since Q2 2014. Additionally, those who expect a pickup in refinance demand in the next three months continued to trend negative on net, remaining near the survey’s lowest readings within the past three years.

“Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home price appreciation, which have drastically reduced refinance activity and restrained home purchase affordability,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “These factors have combined to squeeze mortgage origination volumes and have increased competitive pressures. Increased competitiveness will likely persist as a top driver of lenders’ mortgage business strategy. We expect this will prompt businesses to turn to cost-cutting as a means of managing their bottom lines, with payroll reduction likely to assume a more prominent role in future belt-tightening efforts.”

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS:

Purchase mortgage demand

• For GSE eligible and government loans, the net share of lenders reporting demand growth over the prior three months as well the net share reporting growth expectations over the next three months reached the lowest reading for any second quarter over the past three years.
• For non-GSE eligible loans, the net share of lenders reporting demand growth over the prior three months hit a two-year high for the same quarter (Q2).

Refinance mortgage demand

• For refinance mortgages, on net, more lenders continued reporting declining demand over the prior three months, reaching the lowest level since Q2 2014.
• The net share of lenders reporting demand growth expectations for the next three months continued to be negative, but remained relatively stable from last quarter (Q1 2018).

Easing of credit standards

• The net share of lenders reporting easing of credit standards over the prior three months, as well as the net share of lenders reporting easing for the next three months, remained stable overall.
• However, the net share reporting easing of credit standards for non-GSE eligible loans appeared to tick up from last quarter.
• In particular, the net easing share for non-GSE eligible loans for the next three months reached a survey high.

Profit margin

• Lenders’ net profit margin outlook has stayed negative for seven consecutive quarters. Though it is less negative than the outlook seen last quarter (Q1 2018), it is worse than the one seen one year ago (Q2 2017).
• Since Q1 2017 (for six consecutive quarters), “competition from other lenders” has remained the top reason that lenders cited for their lower profit margin outlook, tying last quarter’s survey high.
• “Market trend changes” continues to be the next key reason lenders cited for their lower profit margin outlook.