Lending Survey Indicates Tightened Standards, Lower Demand

The Federal Reserve has released the October 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices which addresses changes in the supply of and demand for bank loans both to businesses and consumers over the previous three months which, we presume, corresponds to the third quarter of 2007. In this particular survey participating banks were questioned about changes in their lending policies for backup lines of credit for commercial paper and prime nonconforming residential mortgage loans. Banks were asked separately about changes in credit standards and demand for prime, nontraditional, and subprime residential mortgages. The report summarizes responses from 52 domestic banks and 22 foreign banking institutions, a respondent pool which accounts for the majority of the bank lending in the country.

Both domestic and foreign institutions said they had tightened their lending standards and terms for commercial and industrial loans (C&I) over the previous three months and also reported a tightening of lending standards on commercial real estate loans. Domestic banks generally reported that the demand for C&I loans had dropped over the reporting period but foreign banks reported little change in the demand. According to both domestic and foreign institutions there was about a 35 percent lower demand for commercial real estate loans.

Consumer and residential real estate loans, with the exception of credit card loans, which were little changed, were subject to tighter lending standards. Demand for residential mortgages and consumer loans of all types had reportedly weakened, on net, over the past three months.

According to Rex Nutting, writing for MarketWatch, the survey revealed that residential mortgages were harder to get during the period of the survey than at any time in the 17 year history of the survey.

About 25 percent of domestic banks reported that they had tightened their lending standards for consumer borrowers (again with the exception of those applying for credit cards.) This compares with 10 percent of the same cohort that reported tightening standards in the July survey. A few banks indicated that they had tightened terms and conditions largely by reducing the extent to which such loans were granted to customers not meeting credit scoring thresholds.

About 40 percent of respondents indicated that they had tightened their lending standards on prime mortgages, compared with only about 15 percent that reported having done so in the July survey. This represents a tightening of credit for the most credit-worthy of borrowers. Forty of the survey banks originate nontraditional residential loans and of those 60 percent reported a tightening of their lending standards on such loans over the past three months. In the last quarterly survey 40 percent reported such changes.

While most banks in the rarified category of those that are invited to respond to the fed's survey do not deal in subprime loans, 60 percent of those that deal in what are commonly called alt-A loans (usually given to those with good credit but unverifiable income or other factors) reported tightening lending standards while 55 percent of the nine banks that originated subprime mortgages also raised their standards. This was about the same proportion as reported the July survey.

About half of the domestic respondents indicated that the demand for prime, nontraditional, and subprime residential mortgages had weakened over the past three months. This occurred in spite of the bankruptcy of dozens of non-banker lenders and the closing of lending pipelines by dozens of others since mid summer.

A special set of questions about jumbo residential loans were asked in the recent survey and about 45 percent of domestic respondents indicated that the volume of their banks' originations for prime residential mortgage loans defined as "jumbo", that is above the conforming loan limit set by the Office of Federal Housing Enterprise Oversight which is currently at $417,000, had declined over the survey period and 35 percent reported that the percentage of these large loans that had been securitized during the survey had also declined compared to the previous survey period. Domestic banks tightened several lending terms on prime jumbo loans over the past three months, increasing loan fees and spreads of mortgage loan rates over their cost of funds and required more stringent income and asset documentation as well as higher minimum down payments.