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”:
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.
This chart shows the net share of lenders reporting loosening their lending standards for each type of loan (= the share of lenders reporting loosening credit standards minus those reporting tightening standards):
For all three loan types combined, the share of lenders reporting that they loosened credit standards has been rising since last year and has reached a new high in the survey data going back to 2014.
Easing lending standards under competitive pressures, while mortgage demand is declining and profit margins are deteriorating comes at the nick of time.
In many urban markets home prices have soared far beyond their peaks during the prior crazy housing bubble. That bubble ended with such spectacular results, in part because lending standards had been loosened so that more people could be stuffed into more homes, and more expensive homes that they couldn’t afford, and whose prices then plunged when the scheme fell apart.
This time around, home prices, according to the national Case-Shiller Home Price Index, are now about 5% above the prior crazy bubble peak that imploded with such fanfare:
So beyond doubt, this is a great time to relax lending standards to get potential home buyers into homes that they couldn’t otherwise buy at these inflated prices. No one in the industry seems to remember the last housing bust and how it ended for the industry.
In these big US cities, today’s housing markets have blown way past the prior crazy bubble peaks. Read… The US Cities with the Biggest Housing Bubbles