Fed Reports a Pause in Credit Tightening

Most large banks have stopped tightening standards on a number of loan types, according to a new ""report from the Federal Reserve"":http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201002/default.htm. But the central bank's latest loan officer survey says that while it may not be getting tougher[IMAGE]for consumers to borrow, it's not getting any easier yet either because financial institutions have yet to unwind the considerable contraction that has built up over the past two years.

Still, the pause in the stiffening might be seen as a hopeful sign for a financing world that's been strained since 2007 â€" hopeful for pretty much every sector except commercial real estate, that is. That's one of the only loan types where the majority of banks said they'd continued to tighten credit criteria.

""Banks' policies on commercial real estate lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year,"" the report said. ""In addition, banks reported that they had tightened terms on [commercial real estate] loans substantially over the past year.""

[COLUMN_BREAK]

Market observers continue to lament the lack of financing available in the commercial sector, particularly with an estimated 1 in 5 commercial mortgages maturing over the next two years. If property owners are unable to roll this debt into new loans, analysts fear another real estate calamity could be on the horizon.

In response to a special survey question about the quality of commercial and industrial loans on banks' books in the fourth quarter, banks reported higher delinquency rates on loans to small firms than on loans to large and middle-market firms. On net, nearly 65 percent of domestic respondents indicated higher delinquency rates among outstanding loans to small firms.

For other types of loans, the number of banks reporting tighter loan terms trended lower. In line with this pattern, the Fed said only a small net fraction of banks tightened standards on prime residential real estate loans in the fourth quarter. A somewhat larger percentage of banks â€" but still fewer than in previous quarters â€" tightened standards on nontraditional residential real estate loans. Likewise, just a small net fraction of banks reported more stringent lending standards for revolving home equity lines of credit.

Banks reported weaker demand across the board â€" for commercial property loans, prime residential real estate loans, nontraditional mortgages, and home equity loans, alike.

The Federal Reserve's survey results are based on responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.