Banks curbing subprime loans
WASHINGTON – A majority of the nation’s banks have tightened lending standards on subprime mortgages, the Federal Reserve said Monday in a survey that provided further evidence of spreading problems.
The Fed said it found that over half of banks responding to a survey reported they had tightened their lending standards for subprime mortgages, loans offered to borrowers with weak credit histories.
The survey found nearly half of the banks responding said they had tightened loan standards for so-called nontraditional mortgages. The Fed defines this category as adjustable-rate loans with multiple payment options, interest-only mortgages and products referred to as “Alt-A” loans that offer such features as limited verification of incomes.
The Fed survey found that even on prime loans, which offer traditional payment options such as 30-year mortgages to borrowers with strong credit histories, slightly more than 10 percent said they had tightened lending standards in the past three months while none reported easing standards.
The Fed survey on prime mortgage lending was based on the responses of 49 of the country’s biggest banks, accounting for 71 percent of all residential loans on the books of commercial banks.
Analysts said the survey, which they follow closely for trends in the banking industry, showed banks were responding to growing troubles in mortgage lending, reflected by a rising number of mortgage defaults.
“Lending standards are being tightened as aggressively as in the credit crunch of 1990-91,” said Mark Zandi, chief economist at Moody’s Economy.com.
David Wyss, chief economist at Standard & Poor’s in New York, said it was troubling that credit standards are being tightened for business loans given that nonresidential construction activity had been helping to soften the impact of the steep slump in housing construction.
The Mortgage Bankers Association reported recently that the percentage of subprime loans that were 30 or more days past due climbed to 15.75 percent in the first three months of this year, a record high and up from 14.44 percent in the final three months of last year.
The crisis in subprime lending has sent shock waves through other parts of the financial system and caused big drops in the stock market in trading last week as investors worried about whether an expanding credit crunch could seriously harm the overall economy.
The Fed joined with other central banks around the world to add money to the banking system in an effort to bolster confidence.
The crisis in subprime lending reflects an overall slump in the housing market following a boom period in which sales and home prices had both soared.
With sales now falling and prices stagnant, potential buyers are having trouble getting loans because of tighter lending standards, a development that many economists fear will make the housing slump even worse.
The Fed last week kept a key interest rate unchanged while noting tighter credit conditions for some households and businesses.