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Mortgage lenders begin to ease credit standards on GSE eligible loans

Struggle with increasing competition

Credit standards continued to ease in the third quarter, and lenders expect they will continue this trend over the next three months, according to Fannie Mae’s third quarter 2017 Mortgage Lender Sentiment Survey.

During this quarter, more lenders said they had eased credit standards rather than tightened them, according to the survey. If fact, the net share of lenders reporting they eased credit standards over the past three months continued a trend started in the fourth quarter of 2016, reaching new survey highs.

As far as their future outlook, lenders’ expectations held steady from the second quarter for credit easing over the next three months. But when focusing in on GSE eligible loans, the share of lenders who expect to ease credit standards surged to a new survey high.

“Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “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,” Duncan said. “We believe that the GSEs’ attempts to relieve repurchase concerns and expand credit for creditworthy borrowers have contributed to the easing trend.”

Over the past few months, the GSEs introduced new products that could help ease access to credit and simplify the mortgage process.

And the Senate also continues to look for ways to increase access to credit, including considering how to end the FICO monopoly at Fannie Mae and Freddie Mac.

When measuring on an annual basis, more lenders than last year expect credit standards to ease during the fourth quarter for all loan types.

Part of the reason for easing credit standards can be contributed to lender’s negative profit margin outlook, which remained down for the fourth consecutive quarter. The main factor lenders cited was competition from other lenders, which reached a new survey high for the third consecutive quarter.

Lenders who reported growth in purchase mortgage demand decreased for all loan types from last year, reaching the lowest third-quarter reading in the past two years. However, there is still hope for the next quarter as lenders expecting an increase in mortgage demand over the next three months remained stable from the third quarter last year.

“Market competitiveness also led to the fourth consecutive quarter in which lenders’ net profit margin outlook deteriorated,” Duncan said. “The share of lenders citing competition from other lenders as the key reason for a negative profit market outlook rose to a new survey high.”

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