Banks tighten mortgage, commercial standards: Fed

By David Lawder

WASHINGTON (Reuters) - Large banks reported tighter credit standards on nearly all types of loans in the past three months, taking a particularly cautious view of prime and "nontraditional" home mortgages, a Federal Reserve survey showed on Monday.

The tighter standards and more expensive terms are likely to exacerbate problems in the troubled U.S. housing sector, making it more difficult for distressed borrowers to refinance their way out of loans made unaffordable by interest rate resets.

Fed Governor Randall Kroszner said in separate remarks that a smaller pool of funds available for refinancing subprime loans means that foreclosures and delinquencies are likely to rise in coming quarters.

"Conditions for subprime borrowers have the potential to get worse before they get better," Kroszner told a bankers group in Washington.

The Fed's October survey of senior loan officers showed that more than 40 percent of domestic banks polled had tightened lending standards on prime mortgages -- mostly traditional fixed-rate loans made to borrowers with strong credit -- compared to 15 percent in the Fed's July survey.

Of banks originating non-traditional residential loans, 60 percent reported a tightening of standards, compared to 40 percent in July, the Fed said.

More than half the nine banks issuing subprime mortgages tightened standards for this troubled sector, about the same proportion as in the July poll.

Half of the domestic banks surveyed said demand for prime, non-traditional and subprime mortgages had weakened over the past three months.

Responding to a special question on so-called jumbo mortgages that exceed the $417,000 limit for purchases by housing finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N), domestic banks reported that their volumes of these loans fell in the past three months. The share of jumbo mortgages that were securitized also fell, and significant number of bank had raised loan fees and interest rate spreads on such loans.

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The more cautious approach to lending standards also extended to both commercial real estate and commercial and industrial loans. About one-fifth of domestic institutions tightened lending standards on commercial and industrial loans to large and middle-market firms, and a third increased interest rate spreads on such loans.

Foreign-owned banks took an even more cautious view of U.S. businesses, with one-third tightening lending standards and three-fourths increasing price-related terms.

Banks cited a less favorable U.S. economic outlook for their tougher lending standards and terms, as well as a reduced ability to securitize loans, but few banks cited liquidity problems or capital needs as reasons for the change.

"Large majorities of both domestic and foreign respondents also cited decreased liquidity in the secondary market and reduced tolerance for risk as reasons for a move toward more stringent lending policies," the Fed said in the survey report.

A special question on commercial paper financing found that half of domestic banks and three fourths of foreign banks reported tighter lending standards and terms for backup lines of credit for commercial paper programs in the past three months.