Standards tighten on all types of loans
Large banks reported tighter credit standards on nearly all types of loans in the last three months, taking a particularly cautious view of prime and “nontraditional” home mortgages, a Federal Reserve survey showed Monday.
The tighter standards and more expensive terms are likely to exacerbate problems in the troubled U.S. housing sector, making it more difficult for distressed borrowers to refinance their way out of loans made unaffordable by interest rate resets.
Fed Gov. Randall Kroszner said in separate remarks that a smaller pool of funds available for refinancing sub-prime loans meant that foreclosures and delinquencies were likely to rise.
The Fed’s October survey of senior loan officers showed that more than 40% of domestic banks polled had tightened lending standards on prime mortgages -- mostly traditional fixed-rate loans made to borrowers with strong credit -- compared with 15% in the Fed’s July survey.
Of banks originating nontraditional residential loans, 60% reported a tightening of standards, compared with 40% in July, the Fed said.
More than half the nine banks issuing sub-prime mortgages tightened standards for this troubled sector, about the same proportion as in the July poll.
Half of the domestic banks surveyed said demand for prime, nontraditional and sub-prime mortgages had weakened over the last three months.
Responding to a special question on so-called jumbo mortgages that exceed the $417,000 limit for purchases by housing finance giants Fannie Mae and Freddie Mac, domestic banks reported that their volumes of these loans fell in the last three months. The share of jumbo mortgages that were securitized also fell.
The more cautious approach to lending standards also extended to both commercial real estate and commercial and industrial loans. About one-fifth of domestic institutions tightened lending standards on commercial and industrial loans to large and middle-market firms, and a third increased interest rate spreads on such loans.