Fed Loan Officer Survey Shows Widespread Tightening

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Mike Larson takes a closer look at the latest survey figures released by the Federal Reserve. In this issue of Money and Markets, Mr. Larson discusses how the Fed has been driving the cost of money down to increase lending.

The Fed has been driving the cost of money down in an effort to spur more lending. But many banks have instead reduced their exposure to various business lines and eliminated some loan products altogether.

Every quarter, the Fed releases a report called the "Senior Loan Officer Opinion Survey on Bank Lending Practices." It quantifies how many banks are tightening standards, and on which types of loans. The third-quarter survey was conducted in July; 52 domestic banks and 21 foreign banks with operations here in the U.S. responded.

The figures are reported in terms of net tightening/loosening. The Fed adds up the percentage of banks that say they either tightened considerably or tightened somewhat in a given loan category and nets that out against the percentage of banks that eased somewhat or eased considerably. A positive percentage figure means more banks tightened than loosened; a negative percentage figure means more banks loosened than tightened.

The latest survey showed that:

  • Residential mortgage credit was tougher to get all around. The Fed began breaking out separate figures for three sub-categories of home mortgages in the second quarter of 2007. And more recently banks are tightening standards across the board.
  • The trend is spilling over into commercial real estate. This is no longer just a subprime mortgage crunch.
  • Consumer credit is tougher to come by. The story is the same for credit cards, auto loans, boat loans, and other forms of consumer credit. Some 66.6% of lenders said they were tightening standards on credit card borrowers. That was up from 32.4% a quarter earlier and the highest since the Fed began collecting data in 1996. 67.4% are making it tougher to get other consumer loans, up from 44.4% and another record.
  • Lastly, banks are tightening standards and raising the cost of the loans they do make for commercial and industrial customers. A net 57.6% of banks are tightening standards for large and medium sized borrowers, up from 55.4% a quarter earlier and the highest since the first quarter of 2001. More than 80% said they were raising the spread over their cost of funds that they charge large and medium sized borrowers for access to money. That was up from 71% a quarter earlier and the most ever.

We have record-high percentages of lenders tightening standards on residential mortgages, commercial mortgages, credit cards, and consumer loans. Businesses are also finding it tougher and costlier to borrow.
Corporate America will get hit particularly hard with sales and earnings slumping. That's bearish for the stock market.

"As for the financial industry, it's yet another sign that the worst is not over.
Banks are the stingiest ever because they went overboard during the housing bubble, leaving them vulnerable to large losses on previously issued home mortgages. Unfolding downturns in other sectors, like autos and commercial real estate, are starting to drive up delinquencies in other parts of their loan portfolios, too," Larson states.

To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=2090

About Mike Larson and Money and Markets:
Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (http://www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit http://www.moneyandmarkets.com.

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