Banks Continue to Tighten Underwriting

Despite weaker loan demand, about 80% of the largest banks and 55% of smaller banks tightened their lending standards on prime single-family loans during the third quarter, according to a Federal Reserve Board survey of senior loan officers. More than 70% of 52 respondent banks said they tightened the underwriting standards on prime loans even though 25 of the respondents reported "moderately weaker" demand for loans and five banks reported "substantially weaker" demand, according to the October survey. In the July survey, 75% of the banks said they had tightened their prime lending standards during the previous three months. The 52 banks in the latest survey held 78% of all residential mortgage loans in the commercial banking system. Almost all (90%) of the 29 banks that originate nontraditional mortgages said they tightened their lending standards. And all four respondent banks that originate subprime loans tightened too. Meanwhile, 85% of the participating banks that originate commercial real estate loans have tightened their lending standards during the third quarter.