Fed Survey Shows More U.S. Banks Tighten Loan Terms (Update1)

By Scott Lanman


May 5 (Bloomberg) -- The Federal Reserve said the share of banks making it tougher for companies and consumers to borrow approached a record after the subprime-mortgage collapse made them more reluctant to lend.

The quarterly Senior Loan Officers' Survey, published in Washington today, underscores the Fed's concern that $318 billion of credit losses and writedowns among financial firms is causing a credit crunch. The survey, conducted last month, also indicates that the Fed's interest-rate cuts and loans to banks have failed so far to defuse the threat to the six-year economic expansion.

``It's going to be a headwind to growth,'' said Keith Hembre, chief economist at Minneapolis-based FAF Advisors Inc., which oversees $107 billion. ``The change from being readily available and cheap to less available and more expensive is going to deter a lot of borrowing activity.''

Most banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank's quarterly survey of senior loan officers released today in Washington. The proportion of banks raising such rates rose to a net of 70 percent compared to 45 percent in a January report.

The survey data were available to central bank policy makers last week when they cut interest rates by a quarter percentage point.

The report covered 56 domestic banks and 21 foreign institutions. The American banks together have $6.1 trillion in assets, representing about 64 percent of the country's $9.5 trillion total for all domestically chartered, federally insured commercial banks.

`Downside' Risks

Policy makers last week signaled they are ready to hold off on further rate cuts as they assess the impact of the 3.25 percentage points of reductions since September. They dropped a reference to ``downside'' risks to growth from their previous statement.

At the same time, officials acknowledged in their April 30 statement that ``tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.''

Traders anticipate that the Fed will leave its main interest rate unchanged at 2 percent through October, based on futures prices on the Chicago Board of Trade.

``The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey,'' today's Fed report said.

Commercial Property

In commercial real estate, a net 80 percent of U.S. banks said they tightened lending standards, about the same as the January survey. The results of both surveys are about the highest since the central bank began seeking information on the subject in 1990. A net 35 percent of U.S. banks reported slower demand, less than January's 47 percent.

For home loans, the proportion of U.S. banks making it tougher for prime borrowers, those with the best credit, rose to about 60 percent from 53 percent. About one-fourth of U.S. banks reported slower borrowing for prime mortgages and 30 percent said nontraditional loans were weaker, both ``significantly smaller'' numbers of banks than in the January survey.

``I think we're back to 1980s lending'' in terms of acceptable credit records and down payments, David Kittle, the chairman-elect of the Mortgage Bankers Association, said today. Kittle, chief executive officer of Principle Wholesale Lending Inc. in Louisville, Kentucky, spoke at a conference hosted by the trade group in Boston.

Middle Market

The Fed's rate reductions since September have failed to put much of a dent in the cost of a mortgage. The average rate on a 30-year fixed mortgage was 6.06 percent last week, down from 6.46 percent at the start of September though up from 5.45 percent in January, according to Freddie Mac.

A net 15 percent of large U.S. banks said demand increased from large and middle-market companies for commercial and industrial loans. The respondents attributed the rise to borrowing that ``shifted to their banks from other bank or nonbank sources,'' which became ``less attractive.''

At the same time, a similar proportion said demand from small companies slowed, citing a drop in ``customers' needs to finance investment in plant and equipment,'' the Fed said.

In response to special survey questions on home-equity lines of credit, about half of U.S. banks said they tightened terms on existing loans, mainly because of declines in home values below appraised values, as well as increased defaults and changes in borrowers' finances.

Services Growth

Today's report comes amid signs the U.S. economy is weathering the housing and credit contractions. A report today showed service industries unexpectedly grew for the first time since December, while the economy as a whole expanded at a 0.6 percent annual pace in the first quarter, matching the pace of the last three months of 2007.

Fed Chairman Ben S. Bernanke is scheduled later today to speak in New York on mortgage foreclosures, his first public comments since last week's Federal Open Market Committee meeting.

Bernanke's speech coincides with the advance of legislation backed by Democrats that would create a program at the Federal Housing Administration insuring as much as $300 billion in refinanced mortgages. The House is scheduled to consider the bill on Wednesday.

Foreclosure filings rose 57 percent in March from a year earlier, according to Irvine, California-based RealtyTrac Inc.