Historically Tight Lending Standards for All Loan Types

MBA (5/6/2008 ) Velz, Orawin
The credit crunch showed few signs of abating, according to the April Senior Loan Officer Opinion Survey, which tracks demand for and lending conditions on consumer and business loans for the three months ended in mid-April.
Lending standards are now tighter on most types of credit, including business, credit card and other consumer loans, residential and commercial real estate loans as well home equity lines of credit.

The mortgage market continued experience stricter standards in the first quarter. What began as more stringent lending standards for subprime and nontraditional residential mortgage loans in the beginning of 2007 has spilled into the overall mortgage market. About 62 percent of banks tightened standards on prime mortgage loans, compared to about 53 percent in the January survey. Banks also made lending standards more stringent for subprime mortgage loans, with about 78 percent of banks reporting an increase in standards, slightly more than the reported 72 percent in the January survey. For nontraditional mortgage loans, 76 percent reported that they tightened standards, declining from 85 percent in the previous survey.

For commercial real estate, nearly 80 percent of banks said they tightened lending standards, slightly down from 80.3 percent in the January survey, which was the highest share since the Fed began the survey in 1990.

In response to special survey questions on home equity lines of credit, 60 percent of banks tightened standards and nearly half tightened terms on existing loans. The main reasons were declines in home values (which have put the equity in the home below the collateral requirement), increased defaults and changes in borrowers' finances.

The April survey was available to the Federal Open Market Committee (FOMC) on April 30 when it cut the federal funds rate by a quarter percentage point. While the Fed appeared to be less pessimistic about economic conditions according to the post-meeting statement, it acknowledged that financial markets remain under a great deal of stress. It also warned that tight credit conditions and the deepening housing downturn will likely weigh on growth over the rest of the year.

A separate survey from the Institute for Supply Management (ISM) showed that the nation’s activity in the service industries improved. The ISM non-manufacturing index rose to 52.0 in April from 49.6 in March. This was the first time in four months that the index showed a reading above 50, indicating an expanding service sector. The report continued the theme seen last week of better-than-expected economic data outside of housing going into the second quarter.