Financial Services - October 2009

District lending conditions continued to remain tight for both consumers and small businesses during the third quarter of 2009. Banking contacts remained cautious on loan approvals, subjecting borrowers to increased equity requirements, continued scrutiny of appraisals, and generally stricter credit standards.

Freddie Mac Primary Mortgage Market Survey
For the week ending October 16, mortgage rates inched upward for the first time since the end of August. The 30-year fixed mortgage rate averaged 4.92 percent, five basis points higher than the previous week but 12 basis points lower than a month earlier. At this time last year, the rate averaged 6.46 percent.

MBA Mortgage Loan Applications Survey
The Mortgage Bankers Association (MBA) reported in its weekly survey of mortgage bankers, commercial banks, and thrifts that the volume of mortgage loan and refinance applications decreased from the previous week, remaining well below the high levels reached in January and April of this year. The seasonally adjusted market volume index of mortgage applications, which includes purchases and refinances, decreased 13.7 percent for the week ending October 16; the seasonally adjusted refinance index decreased 16.8 percent from the previous week. Both series set recent highs during the week ending October 2.

Senior Loan Officer Opinion Survey
The Federal Reserve Board's July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices (which reflects activity during the second quarter of 2009) indicated that domestic banks continued to tighten standards and terms on all major types of loans to businesses and consumers; however, the net percentage of banks tightening standards declined from the April survey. Most banks expect their lending standards to remain tight until at least the second half of 2010.

Demand for loans continued to weaken across all major categories except prime residential mortgages. Almost 45 percent of domestic banks reported a further weakening of demand for commercial and industrial (C&I) loans from large firms, on net, and 55 percent indicated weaker demand from small firms; both numbers are improvements from the April figures of 60 and 63.5 percent for large and small firms, respectively.

Survey results also indicated that the rate of tightening for loans to businesses edged downward for the third consecutive survey. Approximately 31.5 percent of domestic respondents, on net, reported tighter standards on C&I loans to large and midsize firms during the second three months of 2009, continuing the declining trend that peaked at 83.6 percent in the November 2008 survey. Thirty-four percent of respondents, on net, reported tighter standards on loans to small firms, down from more than 42 percent in April and 69 percent in January.

In the July survey, the net percentage of domestic banks tightening standards on prime residential real estate lending fell to 21.6 percent, down from 74 percent one year earlier. Approximately 46 percent of respondents, on net, reported having tightened their lending standards on nontraditional residential mortgages over the past three months, compared with 64 percent in April.

For the second consecutive survey, domestic banks reported increased demand from prime borrowers for residential mortgages; however, on net, the percentage of banks reporting increased demand fell to 15.7 percent, down from 36.7 percent in April. The net percentage of banks reporting weaker demand for nontraditional mortgages from creditworthy borrowers increased slightly to 16.7 percent.

Domestic banks reported little change in their willingness to make consumer installment loans. On net, the percentage of domestic banks that reported tightening credit card standards fell significantly, from nearly 60 percent to around 35 percent; the net percentage of domestic banks that reported tightening standards on consumer loans (excluding credit cards) fell to 35 percent, down from 45 percent in April. Domestic banks reported tightening of loan terms and conditions for both credit cards and other consumer loans, but the net percentage of banks that tightened in July was not as high as in April.