Interest Rate Roundup

Monday, November 05, 2007

Fed's latest quaterly loan officer data tells us the credit crunch is underway

Every quarter, the Federal Reserve conducts a study of bank loan demand and underwriting standards. The "Senior Loan Officer Opinion Survey on Bank Lending Practices" (yes, it's a mouthful!), in the words of the Fed, is designed to shed some light on "changes in the standards and terms of the banks' lending and the state of business and household demand for loans."

The latest survey (PDF link) was conducted in October; 52 domestic banks and 20 foreign banks with operations here in the U.S. responded. The results are reported in terms of "net tightening/loosening." Specifically, the Fed adds up the percentage of banks that either "tightened considerably" or "tightened somewhat" in a given loan category and nets that out against the percentage of banks that "eased somewhat" or "eased considerably." On this page, which has historical data, a positive percentage figure means more banks tightened than loosened; a negative percentage figure means more banks loosened than tightened.

So what did the just-released October survey show? Widespread tightening of lending standards. In other words, we have clear evidence of a nascent credit crunch. The details:

* A net 19.2% of respondents said they were tightening standards on Commercial and Industrial (C&I) loans to large and medium sized firms. That was the highest net tightening percentage
since Q1 2003.

* Spreads are widening. Specifically, Fed data shows that a net 34.6% of banks are charging wider spreads over their cost of funds on C&I loans to large and medium sized businesses. A quarter earlier, a net 32.1% of lenders reported they were making loans at tighter spreads. The October reading was the highest since Q3 2002, an indication that borrowing costs are going up for corporate borrowers.

* So what about residential real estate? No surprise there. Lenders are tightening the purse strings substantially. Please note: The Fed used to report data on overall residential mortgage standards. Now, it breaks the figures out into prime, nontraditional (payment option ARMs, Alt-A loans), and subprime categories .

With that caveat aside, the net percentage of lenders tightening on nontraditional mortgages jumped to 60% from 40.5% in the prior quarter. The net percentage of lenders tightening prime mortgage standards rose to 40.8% from 14.3%. The net percentage of lenders tightening subprime standards was roughly unchanged at 55.5% (vs. 56.3% in the prior two quarters).

For perspective sake, the overall mortgage tightening index last peaked at 32.7% in Q1 1991. So the tightening readings we're seeing now are UNPRECEDENTED in the history of the data.

* Commercial real estate financing is also getting harder to obtain. A net 50% of banks reported that they were tightening CRE standards. That was up from 25% in Q3 2007 and the highest reading since Q4 1990 (61.68%). This is a big deal. It's a sign that real estate lending fears are spilling over into the commercial mortgage market.


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