Credit Crunch Redux: More of the Same

This just in from the Federal Reserve Board: a majority of large U.S. banks expect the credit crunch to continue. The Fed released its Senior Loan Officer Opinion …

This just in from the Federal Reserve Board: a majority of large U.S. banks expect the credit crunch to continue.

The Fed released its Senior Loan Officer Opinion Survey on Bank Lending Practices for the second quarter of 2008 on August 11. In this survey, the agency asked loan officers at selected banks two sets of “special questions”—one on the outlook for credit standards in the next year, and the other on securitizations and sales of conforming jumbo-loans.

Outlook for Credit Standards This Year

The loan officers are a little gloomier in their projections about business loans than personal lending through the end of this year, the Fed report indicated.

For commercial real estate loans, about 70 percent of domestic bank and 45 percent of foreign bank branch respondents expect their institutions to tighten lending standards in the second half of 2008. About 55 percent of domestic and 45 percent of foreign respondents said they expected their banks to tighten credit standards on commercial and industrial loans by the end of the year.

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For prime residential mortgages, about 45 percent of domestic bank loan officers said they expect to see tighter lending standards by the end of the year.  Concerning nonprime mortgage loans—which the Fed said includes both nontraditional and subprime mortgage loans—28 of the loan officers said their banks don’t make these loans. Of the remaining 20 respondents, about 65 percent said they anticipated tightening their lending standards in the second half of the year.

Credit standards on home equity lines and credit card loans are expected be stricter, too, with 60 percent of the loan officers indicating they expect their banks to tighten up on each of these products. About 50 percent of respondents said they expected to tighten their lending standards on consumer loans other than credit cards through the end of 2008.

Outlook for First Half of 2009

The predictions of tighter credit standards seem to ease up a little in the first half of 2009, the survey report indicated. For commercial loans, respondents at about 45 percent of domestic and 30 percent of foreign institutions anticipated tightening their lending standards on C&I loans in that period, while about half of all respondents see their banks tightening up on commercial real estate loans.

On the personal loan front, only 30 percent said they expect their banks to tighten up on prime residential mortgages between January and July 2009. About 40 percent see tighter standards for home equity lines, 35 percent for credit card loans, and 30 percent on other consumer loans in the first half of next year.

Jumbo Loans

About 30 percent of the domestic bank loan officers indicated that their bank had securitized conforming-jumbo mortgage loans with, or sold them to, Fannie Mae and Freddie Mac in the second quarter of 2008. About 45 percent said they expected their banks to do so before the end of the year.

When asked why their banks are not securitizing or selling conforming-jumbo loans, about 50 percent of respondents pointed to a lack of demand for conforming-jumbo loans at their bank, and about 45 percent cited the cost of the guarantee fees or other pricing terms for these loans. About 40 percent pointed to a limited number of mortgage applicants at their bank who meet the Fannie’s and Freddie’s underwriting criteria.

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