Mortgage Lender Standards Keep Tightening

A wide swath of U.S. banks tightened lending standards for non-traditional and sub-prime home mortgages in recent months, while terms for commercial and industrial loans eased amid tough competition.
The Federal Reserve, in its April survey of senior mortgage loan officers, said 45 percent of domestic banks polled reported a tightening of non-traditional residential mortgage standards.

More than half of the institutions originating sub-prime, or bad credit mortgage loans, have also tightened credit standards.

The survey, which queried 53 U.S. banks on commercial and household lending practices, also found tighter prime lending practices among 15 percent of respondents.

But the Fed said these actions were not associated with tighter standards for sub-prime and nontraditional mortgages, which include payment-option adjustable-rate mortgages and interest-only mortgage loans.

One-fifth of respondents reported lower demand for all types of U.S. home mortgages in the last three months.

Default rates in the sub-prime segment of the market have jumped in recent months as the housing sector has slowed and home prices have fallen.

The mortgage industry crisis has triggered concerns that fallout may cause damage to the overall economy, and has sparked wide debate over whether to increase regulation for the industry.

The Fed survey also queried 20 foreign institutions on their commercial lending practices and found they did not tighten credit standards for commercial real estate loans in the last three months.

Their domestic competitors, however, did tighten standards on such loans.

Among the domestic banks, 35 percent reported weaker demand for commercial real estate loans over the last three months, while foreign competitors reported that demand was largely unchanged.

The survey also showed fierce competition in the market for both commercial and industrial loans. Terms and loan covenants were widely eased, while the maximum size of a home equity line of credit was increased.

One-fifth of domestic banks saw weaker demand for commercial and industrial loans, attributing the drop to borrowers’ increased use of internal funds and decreased needs to finance investment in plants or equipment.

SOURCE: Los Angeles Times