Fed Survey: Mortgage lending standards tightening up

The missing ingredient in this housing bust cycle -- until very recently -- was tighter lending standards. Even after home sales topped out, price growth peaked, and inventories started building, mortgage lenders didn't start restricting credit. Indeed, they actually LOOSENED standards to keep loan volumes up.

Just look at the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices. The quarterly survey covers commercial and residential lending -- whether standards are loosening or tightening, whether demand for mortgage, commercial and industrial loans is rising, etc. It covers around 90 domestic banks and U.S.-based divisions of foreign banks.

The net percentage of institutions tightening standards for residential mortgages was NEGATIVE 9.4% in Q2 2006 and -9.3% in Q3 2006. In other words, once you netted out the banks that were tightening standards vs. those that were loosening them, you found that just over 9% were loosening. That was the most widespread easing of standards recorded since late 1993.

But boy have things changed. This Fed indicator has now swung to POSITIVE 16.4%, the highest reading since Q2 1991 (22.9%). Moreover, about half of domestic banks said they expect "a worsening of the quality of their nontraditional residential mortgage loans this year; a few institutions noted that they anticipate that the quality of such loans will deteriorate substantially in 2007."