Credit Crunch Easing, but Lending Standards Still Tight for Mortgages

The ""Federal Reserve"":http://www.federalreserve.gov says both large and small banks are beginning to ease back on their credit requirements for ""some categories of loans"" to households and businesses.

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However, standards continue to tighten on prime mortgages and home-equity loans, particularly at smaller institutions.

The central bank released the results of its ""October survey of senior loan officers"":http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201011/default.htm Monday. Their answers are used to gauge the current temperature of bank lending practices and are compiled from respondents at 57 domestic banks and 22 U.S. branches of foreign banks.

In response to a special question included in the latest survey, a ""substantial"" number of loan officers said they expected their bank's lending standards would not return to what is considered normal until after 2012, or would remain tighter than is customary for the foreseeable future.

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The research firm ""Capital Economics"":http://www.capitaleconomics.com took an in-depth look at the latest results of the Fed survey. The company says it shows ""no evidence of a loan rebound.""

""[L]enders remain reluctant to lend and borrowers remain reluctant to borrow, supporting our view that U.S. economic growth will continue to stumble along at around 2 percent per annum for some time yet,"" Paul Ashworth, senior U.S. economist for Capital Economics said in a research note released to DSNews.com.

According to the Federal Reserve's study, consumer demand for residential mortgages decreased during the three months ending in October compared to earlier survey periods, with the falloff most evident at smaller institutions.

Banks reported weakening demand for both prime and nontraditional mortgage loans to purchase homes, according to the Fed's summary of survey results. Banks also reported a ""slight weakening"" in demand for home equity lines of credit.

While lending standards for residential mortgages generally became more stringent since the Fed's last survey in July, most respondents reported no change in their bank's standards for approving commercial real estate (CRE) loans.

Similarly, domestic banks reported little change in demand for CRE loans. The banks that did report stronger demand were among the larger respondents in the sample, while those reporting weaker demand tended to be smaller banks. A modest share of foreign institutions also reported stronger demand for CRE loans.