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Mortgage Standards Become Stricter

[Nov 19, 2007.]


A number of banks are becoming stricter when it comes to mortgage standards, according to the Federal Reserve Board, which recently released an interesting survey of the nation's banks.

The move appears to be the latest side-effect of the nation's credit crunch.

The tightened standards apply to prime mortgages, subprime mortgages, and interest only loans. That means that the stricter standards are being enforced across-the-board rather than selectively.

According to the Federal Reserve study, 41% of banks imposed either considerable or somewhat stricter standards for prime residential mortgages. These are the mortgages that are offered to the most credit-worthy homebuyers.
Last July, only 15% of banks had imposed tougher standards, according to a survey that was conducted at that time. Meanwhile, 60% of banks providing non-traditional home loans invoked stricter standards, an increase from the 40% figure recorded in July.

The percentage of banks tightening standards for subprime loans was also high—some 56% of banks offering subprime loans put forward stricter standards. Interestingly enough, though, a number of banks that used to offer subprime mortgages have gotten out of the subprime business altogether. This is clear evidence that the high default rate on subprime loans is having a serious impact on the U.S. banking industry.

The nation's largest bank, Citigroup Inc., expects additional losses of as much as $11 billion. That would be in addition to the $6.5 billion credit-connected losses in the summer months.

It's apparent, though, that the loan crisis is not only impacting the housing industry. The Federal Reserve study indicates that banks are also imposing stricter standards for commercial loans to businesses, as well as other key loans. In addition, one in four banks is tightening rules for consumer loans other than credit card accounts. However, by the same token, a number of banks say that the demand for consumer loans is declining.

Julie Ann Amos
November 19th 2007

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