Interest Rate Roundup

Monday, May 05, 2008

Fed survey shows lenders continuing to tighten standards

Frequent readers know that I pay attention to a study the Federal Reserve conducts every quarter on bank loan demand and underwriting standards. The "Senior Loan Officer Opinion Survey on Bank Lending Practices," 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."

We just got the latest survey (PDF link) results. The Q2 2008 survey was conducted in April; 56 domestic banks and 21 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 latest survey show?

* A net 55.4% of lenders tightened standards on commercial and industrial (C&I) loans to large- and mid-sized customers in Q2 2008. That was up from 32.2% in the prior quarter and -3.7% a year earlier (meaning that a year earlier, banks were generally easing standards on these kinds of loans).

This measure hasn't been higher since Q1 2001 (59.7%). Moreover, 71% of those surveyed were increasing the interest rate premium they charged C&I borrowers above and beyond their cost of funds. That's up from 43.6% a quarter earlier and the highest reading on record. The survey data goes back to 1990.

* What about commercial real estate (CRE) loans? A net 78.6% of lenders tightened standards there. That's the second-highest reading on record (behind Q1 of this year at 80.3%). More banks reported slack demand for CRE financing, though the net percentage figure ticked up to -37.5% from -46.5%.

* The residential mortgage business is in even worse shape. The Fed has only been reporting separate net tightening figures for prime mortgages, "nontraditional" mortgages, and subprime loans since Q2 2007. Some 77.5% of lenders were tightening standards in subprime, while 75.6% were tightening standards in the nontraditional market (think Alt-A loans here). The subprime figure is a new low, while the nontraditional measure is up slightly from 84.6% in the last survey.

More importantly, a net 62.3% of lenders surveyed were tightening standards on PRIME mortgages. That's up from 52.9% a quarter earlier and the highest the Fed has ever found. If you use the historical data series, the previous peak tightening reading for residential mortgages was 32.7% in Q1 1991.

* Last but not least, the percentage of lenders tightening standards on credit card loans jumped to 32.4% from 9.7% in Q1 2008. That's the highest since Q2 1997 (45.9%). The tightening percentage for other consumer loans is now running at 44.4%, the highest since the Fed began collecting data on that category of loans in 1996.

The latest Fed figures tell the same tale -- lenders are generally pulling in their horns after several years of crazy credit condition. The tightening trend is most aggressive in the mortgage arena. But banks are also getting stingier with consumer, corporate, and commercial real estate loans. It's worth noting that measures of consumer credit demand have improved slightly. So it's not that consumers don't WANT to borrow -- it's that many can't under today's tighter guidelines.


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