Mortgage Demand Weakening

Reflecting the slowdown in the nation’s housing market, more U.S. banks reported weaker demand for mortgages in July while commercial and industrial lending was little changed, the Federal Reserve said Monday in a survey of senior loan officers.

As the housing sector cools from its torrid pace, the Fed found that about 60% of respondents saw weaker demand for mortgages, which was “a significantly larger net fraction than in the April survey,” the report said.

Borrowing costs rose in May and June as the central bank raised the overnight lending rate between banks a quarter-point each month. The so-called federal funds rate stands at 5.25%. The Fed left the rate unchanged at its meeting last week.

In response to one question, the Fed survey showed that only a “modest” number of banks reported that loan quality had deteriorated in their sub-prime mortgages. The sub-prime category includes loans made to individuals with weak credit histories or low credit scores.

The Fed also asked about the performance of so-called nontraditional mortgages, such as interest-only mortgages.

“Nearly 30 percent of banks, on net, indicated that they expect the quality of the nontraditional residential mortgage products currently on their books will deteriorate somewhat over the next 12 months,” the Fed survey said.

Both foreign and domestic banks cut prices and standards on commercial and industrial loans, the survey found, “due to more aggressive competition” from bank and nonbank lenders.

“Respondents also cited increased liquidity in the secondary market for these loans, a more favorable or less uncertain economic outlook and increased tolerance for risk,” the Fed survey said.