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May 14, 2007
Got Credit? Depends Who You Are
The Federal Reserve's April Survey of Senior Loan Officers confirms that, yes indeed, those mortgages are both harder to come by and in less demand:
... a relatively small net fraction of respondents reported having tightened lending standards on prime residential mortgages over the past three months, while considerable net fractions of respondents indicated that they had tightened lending standards on nontraditional and subprime mortgage loans. Moderate net fractions of domestic institutions indicated that they had experienced weaker demand for prime, nontraditional, and subprime residential mortgages, and a notable net percentage of institutions also reported weaker demand for consumer loans.
Here are the critical definitions in that passage:
For the purposes of this survey, please use the following definitions of these loan categories (note that the loan categories are not mutually exclusive) and include first-lien loans only:
The prime category of residential mortgages includes loans made to borrowers that typically has relatively strong, well-documented credit histories, relatively high credit scores, and relatively low debt-to-income ratios at the time of origination. This would include fully amortizing loans that have a fixed rate, a standard adjustable rate, or a common hybrid adjustable rate--those for which the interest rate is initially fixed for a multi-year period and subsequently adjusts more frequently.
The nontraditional category of residential mortgages includes, but is not limited to, adjustable-rate mortgages with multiple payment options, interest-only mortgages, and "Alt-A'' products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties. (Please exclude standard adjustable-rate mortgages and common hybrid adjustable-rate mortgages.)
The subprime category of residential mortgages typically includes loans made to borrowers that displayed one or more of the following characteristics at the time of origination: weakened credit histories that include payment delinquencies, chargeoffs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories. prime category of residential mortgages includes loans made to borrowers that typically had relatively strong, well-documented credit histories, relatively high credit scores, and relatively low debt-to-income ratios at the time of origination. This would include fully amortizing loans that have a fixed rate, a standard adjustable rate, or a common hybrid adjustable rate--those for which the interest rate is initially fixed for a multi-year period and subsequently adjusts more frequently.
Although the report indicates that tighter credit standards are specific to the lower-quality part of the market...
... the weaker demand is broad-based:
On the "will commercial activity take up the slack" watch, I'm going to count the report as confirmation of what we already thought we knew -- credit availability isn't so much a problem, but good uses with which to put it may be:
Domestic and foreign institutions indicated that they had eased some terms on commercial and industrial (C&I) loans over the past three months, but that they had made few changes in credit standards on such loans. Domestic respondents reported that they had tightened credit standards on commercial real estate loans over the previous three months. Demand for both C&I and commercial real estate loans at domestic banks was reportedly weaker, on net, in the April survey. By contrast, foreign institutions noted that demand for both C&I and commercial real estate loans had not changed over the survey period.
The nature of the survey, of course, is sort of like taking a picture in the rear-view mirror, but it's the best we have at the moment. If I was trying to glean some news out of the survey, I think I would emphasize the across-the-board softness in the demand for housing. Just another confirmation that real estate prices probably have a way to go yet.
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