Loan officer opinion survey addresses bank lending practices

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The January 2002 Senior Loan Officer Opinion Survey on Bank Lending Prac-tices, conducted by the Federal Reserve Board, focused on changes in the supply of and demand for bank loans to businesses and households for the three previous months.|ret||ret||tab|

Supplementary questions addressed changes in terms on commercial real estate loans for the past 12 months, the behavior of customers who refinanced their residential mortgages in the last six months of 2001 and the credit quality of loans to households. |ret||ret||tab|

Loan officers from 55 large domestic banks and 23 U.S. branches and agencies of foreign banks participated in the survey.|ret||ret||tab|

The results of the survey suggest some further tightening of standards and terms for loans to both businesses and households, as well as generally weaker loan demand. |ret||ret||tab|

The number of foreign and domestic banking institutions that reported tightening standards and terms on commercial and industrial) loans for the three months prior to the survey remained high, though it edged down at domestic banks and up at foreign banks. The fraction of domestic institutions that indicated tightened standards for commercial real estate loans in the January survey also remained elevated.|ret||ret||tab|

According to the survey, standards for residential mortgage loans were largely unchanged for the past three months, and demand for these loans was moderately stronger on net. Domestic banks, on net, reported tightening standards for all types of consumer loans in the January survey, with the proportion tightening about the same as in the October 2001 survey and about half that in C&I loans. Respondents reported that significant fractions of customers seeking to refinance existing mortgages over the past six months extracted equity from their homes, typically increasing their outstanding balances 5 percent to 15 percent. The most common use for the additional funds was said to be the repayment of other debt.|ret||ret||tab|

About half of domestic banks reported lending to subprime borrowers. How-ever, most banks that participate in this market reported that these loans constitute less than 5 percent of their total loans to households. Banks were also asked about the credit quality of loans to households relative to what the banks' credit-scoring models would have predicted a year ago (taking into account the behavior of the economy over that period). On net, banks reported that standard residential mortgage loans performed somewhat better than would have been expected, while the performance of other categories of household lending was somewhat worse than predicted.|ret||ret||tab|

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Commercial real estate loans|ret||ret||tab|

The fractions of domestic banks and foreign branches and agencies that reported tighter standards on commercial real estate loans remained about un-changed from the October survey at 46 percent and 23 percent respectively. Responses to a special question addressing changes in terms on commercial real estate loans over the past year also indicated that banks have become less accommodative lenders. |ret||ret||tab|

More than 40 percent of both domestic and foreign banks increased the spread of loan rates over their cost of funds. Significant fractions of banks also re-ported that they reduced loan-to-value ratios and increased required debt-service coverage ratios. |ret||ret||tab|

Nearly all banks that tightened terms expressed concerns about the economic outlook and their local real estate market, and also indicated a reduced tolerance for risk.|ret||ret||tab|

The demand for commercial real estate loans weakened at survey respondents' banks over the past three months, with 43 percent of domestic and 17 percent of foreign banks, on net, reporting lower demand for this type of loan. |ret||ret||tab|

A special question indicated that, over the past year, loan demand for most types of commercial structures weakened, particularly demand for loans to finance office buildings and hotels. One exception was loan demand for multi-family homes or apartment buildings, which remained about unchanged, on net, over the past year.|ret||ret||tab|

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Mortgages. |ret||ret||tab|

Banks' credit standards for approving residential mortgage loans were largely unchanged over the past three months, with only one bank reporting that it had tightened lending standards somewhat. On net, about 30 percent of domestic respondents reported increased demand for residential mortgages.|ret||ret||tab|

A series of special questions asked banks about the behavior of their customers during the recent wave of mortgage refinancing. |ret||ret||tab|

The results: 60 percent of domestic banks reported that between 10 percent and 30 percent of their customers in-creased their outstanding balance when they refinanced their mortgages, and more than 25 percent of banks reported that more than 30 percent of their customers had done so. |ret||ret||tab|

Domestic banks also reported that those customers who increased the outstanding balance of their mortgages during refinancing typically did so by 5 percent to 15 percent. |ret||ret||tab|

A few banks indicated that these customers commonly increased the size of their loans by as much as 25 percent. One-fourth of the respondents indicated that, to the best of their knowledge, more than one-half of their customers that received cash out from their refinancing used the funds to repay other debt, and an additional one-third reported that between 30 percent and 50 percent of customers used the funds from refinancing for this purpose. The majority of banks also reported that as many as 30 percent of these customers used the funds for home improvements or consumer expenditures.|ret||ret||tab|

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Consumer loans|ret||ret||tab|

Almost one-fifth of banks reported that they had tightened standards on both credit card and other types of consumer loans over the past three months, slightly lower fractions than reported having done so in the October survey. |ret||ret||tab|

Seven percent of banks raised spreads of interest rates charged on outstanding credit card balances relative to their cost of funds, a 10 percentage point decline from the October survey, and 10 percent, on net, did so for other types of consumer loans. About one-fifth of domestic banks increased the minimum required credit score for credit card applications, and 24 percent increased it for other types of consumer loans, up from 14 percent and 13 percent, respectively, in October. |ret||ret||tab|

In addition, nearly one-fifth of banks indicated that fewer credit card loans were extended to customers that did not meet credit-scoring thresholds and 31 percent indicated fewer exceptions were made for other types of consumer loans. Banks reported that, on net, demand for consumer loans was unchanged over the past three months, after having declined in the October survey.|ret||ret||tab|

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Household credit quality |ret||ret||tab|

The final set of special questions addressed the extent to which banks participated in the subprime lending market and the overall credit quality of banks loans to households. |ret||ret||tab|

More than half of the domestic banks that responded indicated that they either held or securitized subprime mortgages over the past year. About one-third of responding banks participated in the market for non-credit-card loans to subprime borrowers, while only one-fifth of responding banks were involved in the consumer subprime credit card market. |ret||ret||tab|

However, the amount of subprime lending was limited: these loans accounted for less than 5 percent of total loans in each category at more than two-thirds of the banks that participated in the subprime markets. In addition, no bank indicated that subprime loans accounted for more than 20 percent of any category of household loan. |ret||ret||tab|

Note, however, that the Senior Loan Officer Opinion Survey focuses on commercial banks and therefore these re-sponses would not reflect subprime lending activity at nonbank subsidiaries of the respondent banks' holding companies. [[In-content Ad]]