Banks tightening the lending screws

The Federal Reserve just released its latest quarterly survey on loan demand and lending standards. The so-called "Senior Loan Officer Opinion Survey on Bank Lending Practices" may sound like a mouthful, but it contains extremely important information on lending conditions. Some key standouts from the latest survey:

* The Fed broke out its residential mortgage statistics by type of loan for the first time. Lending standards on prime loans didn't change all that much. But a whopping 45.5% of the lenders polled reported tightening standards on "nontraditional" loans, while an even greater 56.3% were cracking down on subprime lending.

* We're seeing more tightening of standards in the commercial real estate lending market. Some 30.2% of survey respondents said they were tightening CRE standards, up from 1.8% a year earlier. That's the second-highest reading (behind Q4 2006) in five years. Demand for CRE financing is dropping as well. A measure of loan demand dropped to -35,8, the weakest since Q1 2002.

As I've mentioned before, a lot of higher-risk commercial mortgage financing has been handed out in the past couple of years. Now, it appears banks may be starting to worry that they went too far, just like they did in the residential market between 2003 and2006.