Financial Services - January 2010

In December, most banking contacts reported that credit standards were unchanged and remained at higher levels for most types of loans; they continued to require more documentation and allowed fewer exceptions. Some contacts reported easing credit standards for strong businesses and customers with better-rated credit, while a few reported a general tightening of credit standards. There were widespread reports of tightening credit standards for commercial real estate and, to a lesser extent, commercial and nonresidential loans.

Loan demand varied across the District. Most increases in loan demand were attributed to customers refinancing mortgages, companies trying to establish new relationships as more restrictions were placed on loan renewals, and loans to tax-exempt entities. Some contacts noted credit requests from "unqualified" applicants had increased but were not being approved. New home financing remained depressed.

Freddie Mac Primary Mortgage Market Survey
For the week ending January 22, mortgage rates declined for the third consecutive week but remain above the record low rates set in early December. The 30-year fixed mortgage rate averaged 4.99 percent, 7 basis points lower than the previous week and 6 basis points lower than a month earlier. In January 2009 the rate averaged 5.12 percent.

MBA Mortgage Loan Applications Survey
In its weekly survey of mortgage bankers, commercial banks, and thrifts, 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 last seen in April 2009. The seasonally adjusted market volume index of mortgage applications, which includes purchases and refinances, increased 9.1 percent for the week ending January 15; the seasonally adjusted refinance index increased 10.7 percent from the previous week. The refinance share of mortgage activity represents 71.7 percent of total application volume.

Senior Loan Officer Opinion Survey
The Federal Reserve Board's October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices (which reflects activity during the third quarter of 2009) indicated that domestic banks continued to slow the rate at which they were tightening standards and terms on all major types of loans to businesses and consumers. Except for prime residential mortgages and revolving home equity lines of credit, the net percentage of banks tightening standards for most loan categories declined from the July survey; all categories remained below the peaks set in 2008. Demand for loans continued to weaken across most major categories except prime residential mortgages.

The rate of tightening for loans to businesses continued to edge downward from its peak in November 2008. Banks cited reduced tolerance for risk, a less favorable or more uncertain economic outlook, and a worsening of industry-specific problems as reasons for continued tightening of commercial and industrial (C&I) credit standards and terms. Domestic banks reported that the weakening of demand for C&I loans continued during the third quarter but has slowed.

The net percentage of domestic banks tightening standards on prime residential real estate loans increased slightly from the previous survey but remained significantly below the peak in July 2008. The net percentage of domestic banks tightening their lending standards on nontraditional residential mortgages decreased over the past three months but remains well below the peak in October 2008. For the third consecutive survey, domestic banks reported increased demand from prime borrowers for residential mortgages. Demand for nontraditional mortgages from creditworthy borrowers increased but remained slightly below neutral.

Domestic banks reported little change in their willingness to make consumer installment loans, tightening loan terms and conditions for both credit cards and other consumer loans.

Special Questions
The October survey included three sets of special questions: The first asked about reasons for the decline in C&I loans, the second asked about the status of commercial real estate (CRE) loans on banks' books, and the third asked banks about potential changes in credit card lending due to the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009.

Domestic banks cited decreased originations of term loans and decreased draws on revolving credit lines as two very important sources for declines in C&I loans during the first eight months of 2009.

Among domestic banks surveyed that had CRE loans scheduled to mature by September 2009, about 75 percent indicated they had extended more than one-fourth of the maturing construction and land development loans; 70 percent also reported extending more than one-fourth of the loans secured by nonfarm nonresidential real estate. Only 15 to 20 percent reported they had refinanced more than one-fourth of each of these two types of maturing CRE loans.

Banks expect to tighten many of the terms and conditions of credit card loans for both prime and nonprime borrowers as a result of the Credit CARD Act. Exceptions include penalty fees and length-of-grace periods for payments. Most banks indicated they had not fully complied with the new law but expect to be compliant by January 2010.