Banks Continue to Pull Back on Credit

The latest data from the Federal Reserve, released late Tuesday, paints an interesting contradiction for residential real estate lending: banks are continuing to pull back on credit, despite infusions of fresh capital via the U.S. Treasury’s Capital Purchase Program. And loan officers suggested the demand for residential mortgages is waning, despite a veritable flood of interest in refinancing activity as of late among borrowers. The Fed’s survey of loan officers reported tighter lending standards at a “smaller, though still substantial, fractions” of U.S. lenders for residential mortgages. 45 percent of U.S. banks indicated they had tightened prime lending standards; and nearly 50 percent of the 25 banks that originated nontraditional mortgages said they’d tightened credit. None of this should surprise, given deteriorating asset quality and the issue of whether or not a secured interest is indeed really all that secure in the current banking environment. But oddly enough — what should perhaps surprise — is that about 10 percent of domestic respondents reported weaker demand, on net, for prime residential mortgage loans over the past three months. While that’s a significantly lower fraction than the roughly 50 percent that so reported in the October survey, it’s still interesting that anyone in this market would see demand for prime product falling. Demand continued to slip in January for nontraditional mortgages, with about 65 percent of respondents reportedly experiencing weaker demand. Part of that may be due to the fact that anyone making “subprime” loans in this market is doing FHA, which isn’t captured as such in the Fed’s data; only four banks reported making subprime mortgage loans over the past three months, as a result. HELOCs continued to see underwriting criteria tightened as well, with 60 percent of U.S. respondents reporting that lending criteria for home equity loans and lines of credit had tightened over the past three months. The full survey is available here. Write to Paul Jackson at [email protected].

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