Banks still cautious on mortgage lending, Fed survey finds

MarketWatchNovember 3, 2012 

— Interest rates are at record lows, house prices are starting to creep higher, and foreclosures have dropped, but banks aren’t making it any easier to get a mortgage, according to the latest survey of senior bank officials.

The Federal Reserve last week released its quarterly survey of senior loan officers, and the report found that American banks and foreign lenders’ branches have made it easier to get business loans, commercial real estate projects, car loans and credit cards, but not mortgages.

Despite not making it easier to obtain home loans, banks have reported increasing demand for mortgages, in line with data showing improving sales of homes as well as a spike in refinancing activity.

In a special question, the Fed found that standards were getting tougher for mortgages insured by the Federal Housing Administration, particularly for borrowers with weaker credit scores. Nearly three-fourths of senior loan officers said they were less likely to approve a loan for an applicant with a FICO score below 580.

Why were the banks were reluctant to lend? “Putback risk” – basically the risk that the FHA would force them to buy back bad loans.

The survey found also that businesses’ demand for loans weakened slightly in the third quarter even though U.S. banks eased their lending standards. This is the first weakening in demand for business loans in a year.

With global economic growth slowing and the fiscal cliff looming, businesses are increasingly reluctant to borrow, said Paul Ashworth, chief U.S. economist at Capital Economics.

David Silver, economist at JPMorgan Chase & Co., said weak global growth is weighing more on larger firms that have exposure outside of the United States.

The report fits with an economy where businesses are showing caution while homeowners are spending a bit more.

The Fed’s quarterly survey of senior loan officers showed demand picked up for commercial real estate loans, residential mortgages and auto loans.

Bank lending to businesses has been brisk in the past 12 months. Asked to explain the pick-up, banks said that they had benefited from less foreign competition. Other banks said that they wanted to diversify into new business lines.

The Fed found that U.S. banks continue to tighten credit to European banks and other businesses.

The Fed surveyed officials at 68 domestic banks and 23 U.S. branches of foreign banks from Sept. 25 to Oct. 9.

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