Banks, Fed Discuss Decline in Mortgage Loan Demand

Banks reported softer demand for mortgage and commercial loans in the three months ending in July, the Federal Reserve said, adding to evidence that the pace of economic growth has slowed.

The Fed’s quarterly survey found 56 percent of 16 lenders making subprime, or bad credit mortgage loans, had tightened standards from April-July 26.

Subprime loans are higher-cost products aimed directly at consumers with poor credit. Subprime mortgage loan demand was down more than 40 percent - more than twice the dip of the second quarter.

Still, concerns about the housing recession and soaring defaults in the subprime market affected a minority of prime rate borrowers, according to the survey.

About 14 percent of lenders clamped down on mortgages to customers with good credit. That is slightly below the 15 percent figure in the second quarter of the year, but “not an insignificant proportion,” Moody’s Economy.com said.

“Also worrisome is the fact that demand for” commercial and industrial home loans “has weakened noticeably and that banks are tightening standards on these loans due to a more uncertain economic outlook and a lower appetite for risk.”

About a quarter of the 52 domestic banks that took part in the Fed’s survey noted tighter standards for commercial real estate loans, about the same level as in April. The commercial real estate market has been soaring, while the housing market has been in recession.

The survey may not show the true extent of problems in the home mortgage markets. It was completed before last week’s stock market meltdown.

SOURCE: Detroit Free Press