Financial Services - April 2010

Contacts report that credit remains tight, especially for commercial real estate and, to a lesser extent, commercial and nonresidential loans. Small businesses with cash flow issues and nonprime customers continue to have an especially difficult time obtaining credit. Qualified borrowers are taking advantage of recent interest rate volatility to lock in low fixed-rate loans as the end of the homebuyer tax credit approaches.

Freddie Mac Primary Mortgage Market Survey
For the week ending April 23, mortgage rates on fixed loans were unchanged from the previous week, remaining above the record low rates set in early December. The 30-year fixed mortgage rate averaged 5.07 percent, 8 basis points higher than a month earlier. Rates on 30-year fixed mortgages remain above 5 percent for the fourth consecutive week. At this time last year, the rate averaged 4.80 percent.

MBA Mortgage Loan Applications Survey
In its weekly survey of mortgage bankers, commercial banks, and thrifts for the week ending April 16, the Mortgage Bankers Association (MBA) reported that the volume of mortgage loan and refinance applications increased from the previous week but remains well below the high levels seen in April 2009. The seasonally adjusted market volume index of mortgage applications, which includes purchases and refinances, increased 13.6 percent. The seasonally adjusted refinance index increased 15.8 percent from the previous week. The refinance share of mortgage activity is currently at 60 percent of total application volume.

Senior Loan Officer Opinion Survey
The Federal Reserve Board's January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices (which reflects activity during the fourth quarter of 2009) indicated that banks continued to slow the rate at which they were tightening standards and terms on all major types of loans to businesses and consumers, but they still have to unwind the tightening that has occurred during the past two years. Loan demand from both businesses and households weakened further during the last quarter of 2009 even as the net percentage of banks reporting tighter lending standards continued to trend lower.

Banks reported little net change in their standards for commercial and industrial (C&I) loans in the fourth quarter. Some of the largest domestic banks reported easing terms related to loan maturities and loan spreads to large and midsize firms. Most banks that reported easing credit standards cited competition from other banks or nonbank lenders and a more favorable economic outlook as reasons for the change. Domestic banks reported that demand for C&I loans from all sizes of firms weakened further overall, although the net fraction was somewhat smaller than in the October survey.

Demand for both prime and nontraditional mortgages weakened further during the fourth quarter. A smaller net fraction of banks continued to tighten standards on prime mortgage loans. The net percentage of domestic banks tightening their lending standards on nontraditional residential mortgages decreased over the past three months and remains well below the peak in October 2008.

Special Questions
The January survey included three sets of special questions: the first asked about delinquency rates of C&I loans by firm size, the second asked about tightening terms on commercial real estate (CRE) loans over the course of 2009, and the third asked banks about their outlook for delinquencies and charge-offs across major loan categories in the current year.

Banks reported that at the end of the fourth quarter, delinquency rates on outstanding loans were higher for small firms than for large and midsize firms.

Large net fractions of institutions reported having tightened terms substantially on CRE loans in 2009; the largest net tightening was reported on the spreads of loan rates over banks' cost of funds, debt-service coverage ratios, and loan-to-value ratios. Banks also reported weaker demand for CRE loans.

The outlook for delinquencies and charge-offs in the current year was more positive for large and midsize firms than for smaller firms. Other than commercial and residential mortgages, banks expect asset quality to stabilize this year. In contrast with surveys conducted over the past two years, substantially fewer respondents reported expectations of widespread deterioration in credit quality over the coming year across all major loan categories. Banks anticipate significant deterioration in CRE loans, prime residential mortgages, and other revolving home equity lines of credit this year but expect the quality of other types of loans to change little or improve on net.