More banks tightened standards on residential and commercial real estate loans during the final quarter of 2007 than at any time in the 17-year history of the Federal Reserve’s quarterly survey of loan officers.

A record 55 percent of loan officers at domestic banks surveyed in January said they’d tightened standards on prime residential mortgages in the fourth quarter of 2007, compared with 40 percent in the previous survey in October.

Of the more than 50 banks surveyed, 64 percent said demand for prime mortgages was weaker, with 32 percent saying it was about the same. Only two banks, or 4 percent of those surveyed, said demand for prime mortgages was stronger.

Some 85 percent of banks offering nontraditional residential mortgages such as interest-only and payment-option adjustable-rate mortgages said they’d tightened standards. Demand for nontraditional mortgages was off at 72 percent of banks, and about the same at 26 percent. Only one bank reported an increase in demand for nontraditional loans.

Although only seven out of 54 banks surveyed said they offered subprime loans, five said they had tightened their standards, three “considerably.” Demand for subprime loans was weaker at five of seven banks.

About 80 percent of domestic banks said they tightened their lending standards on commercial real estate loans over the past three months, the highest percentage since the survey began in 1990.

About 60 percent of loan officers at domestic banks said they’d tightened standards for approving home-equity lines of credit, and 35 percent said demand for revolving home-equity lines of credit had weakened over the past three months.

In addition to tightening lending standards, many of the bank loan officers surveyed were also pessimistic about the future performance of loans on their books.

Between 70 percent and 80 percent of loan officers at domestic banks said they expected the quality of their prime, nontraditional and subprime residential mortgage loans, as well as of their revolving home-equity loans, to deteriorate in 2008. About 70 percent of loan officers at domestic banks expected a deterioration in the quality of credit-card and other consumer loans.

More than 85 percent of those surveyed said loan-by-loan modifications based on individual borrowers’ circumstances would be an at least “somewhat significant” loss-mitigation strategy at their banks.

More than 65 percent of respondents also anticipate steps such as short sales or deed-in-lieu of foreclosures to be at least “somewhat significant” loss-mitigation steps at their banks.

Many said their banks’ loss-mitigation strategies will include refinancing of loans into other mortgage products at their banks or into Federal Housing Administration (FHA) products. Only 35 percent of respondents expected streamlined loan modifications of the sort proposed by the HOPE NOW alliance to be at least a somewhat significant loss-mitigating strategy for their banks.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Thank you for subscribing to Morning Headlines.
Back to top
Use code JULY4 at checkout & save $50 on your Connect Now Bundle!Get the deal×