Mortgage Loan Criteria Continue to Tighten

A recent survey of banks by the Fed indicates that the criteria for non-traditional, prime, commercial property mortgages were continuing to tighten. From Market Watch:

U.S. banks continued to tighten their standards for approving mortgage loans in the spring and early summer months, the Federal Reserve said Monday.

In particular, banks were imposing tougher standards before they'll approve subprime and nontraditional mortgages. But even the borrowers with the best credit were facing tougher standards at some banks.

Loose lending standards for mortgages over the past several years had inflated the housing market, but now the tightening of those standards has led to the bankruptcy of several lenders and the insolvency of some hedge funds that had invested heavily in U.S. mortgages. Worries about further repercussions have hit global financial markets in recent weeks.

Analysts are worried that the market volatility since late July will in turn cause banks to further curtail credit in coming months, endangering a fragile economy.

In the three months ending in July, 56% of the 16 banks that make subprime loans toughened their standards, the Fed found. This was roughly the same percentage that tightened standards in the first quarter.

The survey found 40% of banks raised standards for obtaining a nontraditional mortgage, compared with 46% in the first three months of the year.

Meanwhile, 14.3% of banks made it harder to get a prime mortgage loan, compared with 15% in the first quarter.

The Fed also said 25% of banks surveyed raised standards for getting a commercial real estate loan.

No bank surveyed eased standards for those loans.

Over the past three months, demand for all three types of mortgage loans has weakened. Thirty-six percent of banks reported "moderately weaker" demand for prime mortgages, 21% of banks said demand for non-traditional mortgages was moderately weaker and 31% of banks said demand for subprime loans had gone down moderately.

The Fed's survey is based on responses from 53 U.S. banks and 20 foreign banks.