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Fed Survey Finds Banks Tightening Credit

Banks, lenders anticipate economic deterioration in 2008

By Martin H. Bosworth
ConsumerAffairs.com

February 4, 2008

The survey, conducted in early January 2008, found that "80 percent of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months," and that 55 percent of foreign banks indicated they had tightened their lending standards on such loans.

Forty-five percent of both domestic and foreign respondents reported weaker demand for commercial real estate loans over the past three months.

"A large number of domestic and foreign respondents pointed to a less favorable economic outlook and to a worsening of the conditions of, or the outlook for, commercial real estate in the markets where their banks operate as reasons for tightening terms on commercial real estate loans in 2007," according to the report.

The survey asked banks and lenders a set of special questions relating to current economic trends and the respondents' forecast of potential developments.

"Regarding loans to businesses, between about 75 percent and 85 percent of domestic and foreign banks expect a deterioration in the quality of their...commercial real estate loan portfolios," the report said.

"[A]bout 70 percent and 80 percent of domestic respondents expect the quality of their prime, nontraditional, and subprime residential mortgage loans, as well as of their revolving home equity loans, to deteriorate in 2008. Finally, about 70 percent of domestic respondents expect a deterioration in the quality of both credit card and other consumer loans."

The bankers and lenders interviewed for the Fed survey were particularly pessimistic about "loss mitigation strategies" designed to help troubled homeowners avoid foreclosure, even as foreclosure reports and delinquencies skyrocket around the country.

"Respondents anticipate difficulties in contacting borrowers, and they are concerned with borrowers' reduced motivation to retain possession of their properties. To a lesser extent, respondents also anticipate difficulties arising from a shortage of qualified loss-mitigation specialists at their banks," the report said.

The survey was based on responses from 56 domestic banks and 23 foreign banking institutions. The survey, which is conducted every three months, was completed before the Federal Reserve's recent aggressive moves to stem the economic woes caused by the mortgage meltdown and global credit crunch.

On January 22, the Fed convened an emergency meeting and voted to cut the prime lending interest rate by a whopping 0.75 percent, in order to spur more borrowing and lending, and to ease the burden of ballooning mortgage payments brought on by adjustable-rate mortgages resetting.

A week later, at its regular meeting, the Fed governors voted to cut interest rates by another one-half percentage point, hoping that the one-two punch of lower interest rates would be enough to get consumers, who have been pulling back on spending, to open their wallets again.

As it takes several months to accurately gauge any changes to the economy, it may be too soon to predict if the Fed's moves will be able to stave off an even greater economic slowdown that may lead to recession.

The survey and accompanying documents are available as a free PDF download from the Federal Reserve Web site.

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