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

Recent News

• Fed Poised to Cut Interest Rate
  The Federal Reserve Board appears to be readying to slash a key interest rate. The much-anticipated move could offer relief to the housing market and credit industry, which have both been pummeled over the last few months.[21st November 2007]


• Student Loans Considered a Good Kind of Debt
  Analysts now say that student loans are considered a good type of debt. That's because a college education is classified as a worthwhile investment over the long haul. [21st November 2007]


• Some Investors Expect Downturn in Commercial Real Estate Market
  Not so long ago, investors predicted that the residential real estate market would suffer a significant setback. They were right on that score—the housing market is at its lowest ebb in some 16 years. [19th November 2007]


• Slow Economy Hurts Hiring
  Slow growth in the nation's economy is having an impact on holiday hiring. [19th November 2007]


• Economic Concerns Cause Drop in Factory Orders
  The U.S. Commerce Department reports that orders for big-ticket manufactured goods dropped last month amid new signs of economic turmoil. [19th November 2007]


• Mortgage Rates on the Decrease
  Mortgage rates appear to be on the decline once again. The rates dropped to a nationwide average of 6.33% this week. That's down from 6.4% the previous week. The rates applied to 30-year, fixed-rate mortgages. The statistics come courtesy of Freddie Mac, the mortgage giant.[16th November 2007]