Much of the news over the summer of 2008 has been negative, somewhat depressing, and duplicative. Unfortunately, our post today is much of the same, but there comes a time when there is just no way to avoid the news. The truth is that we need to know how to set our course in the days to come.

As reported by Craig Torres today in Bloomberg News, the Federal Reserve said more banks made it harder to borrow money as defaults and delinquencies on home loans soared and the economy faltered.

• The survey, conducted last month, covers 52 domestic banks with combined assets of $6.1 trillion, along with 21 foreign institutions.
• About 75 percent of U.S. banks indicated they tightened standards on prime mortgage loans, up from 60 percent in the previous survey, the central bank said.

Most domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months, the Fed said today in its quarterly Senior Loan Officer Survey.

Funds were scarcer for homebuyers and small businesses, credit card loans became tougher to get, and even banks’ best customers were subject to greater scrutiny.

Along these lines, read the New York Times article  — Mechanism for Credit Is Still Stuck –that analyzes the credit issue in quite some depth. Ultimately, the question is, where will the credit come from?

Defying Monetary Policy : The Fed has reduced its main rate 3.25 percentage points over the past 11 months to 2 percent. Still, rates on a 30-year mortgage stood at 6.52 percent Aug. 7, nearly unchanged from 6.59 percent a year ago, according to data from Freddie Mack.

Banks may be reluctant to lend against housing collateral that is falling in value. Home prices in 20 U.S. metropolitan areas dropped 15.8 percent in May, the biggest decline since record keeping began in 2001, according to the S&P Case-Shiller Home-Price Index.

Bandwagon Effect: When times are tough, the herd starts running in the other direction, with tougher standards pretty much across the board. And here are the facts. The economy is, in fact, faltering:

• The unemployment rate has moved up 1 percentage point during the past 12 months to 5.7 percent,  
• Delinquencies on home loans to borrowers with weak or limited credit histories rose to 18.8 percent in the first quarter from 13.8 percent a year earlier.

Large majorities of domestic bank respondents reported having tightened their lending standards on prime, nontraditional, and sub-prime residential mortgages over the previous three months, the Fed said. Of the 32 banks that originate non-traditional mortgage loans, about 85 percent reported tighter lending standards, up from 75 percent in the prior survey, the Fed said.

Prime Standards

• For prime mortgage loans, about 45 percent of domestic banks said they would tighten standards in the second half of this year (2008), 

•  About 30 percent of domestic banks said they anticipated tightening standards in the first half of 2009.

• About 65 percent of domestic banks indicated they had tightened their lending standards on credit card loans over the previous three months, up notably from about 30 percent in the April survey, the Fed said. 

•  Most banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank. The proportion of banks raising such rates rose to a net of 80 percent, compared with 70 percent in the April survey.

Business Credit

• Some 55 percent of domestic banks surveyed told the Fed that they would continue tightening credit standards for business loans in the second half of this year,

• With 65 percent of the institutions making terms stricter for loans to small firms.

• Federal funds futures traders see a 69 percent chance that the benchmark lending rate will remain unchanged at the October 29 meeting.

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Posted in CMBX, Subprime, Residential Real Estate, Delinquency Rates, Real Estate Brokers, Bankers, Market Trending, Historical Perspective, Mortgages, Commercial Real Estate | 2 Comments