Fed survey: bank lending tight through mid-2010

The Federal Reserve said Monday most banks expect their lending to remain tight through the second half of next year, with the exception of mortgage standards, which already are loosening a bit.

The Fed's latest survey of loan officers found that about 20 percent of U.S. banks tightened their lending standards on prime home mortgages in the April-June quarter, down from around 50 percent in the previous quarter and a peak of about 75 percent a year ago.

Meanwhile, 45 percent of banks say they tightened standards on nontraditional mortgages, such as adjustable-rate loans with multiple payment options, down from 65 percent in the previous survey.

Around 35 percent of U.S. banks reported tightening their lending standards for credit cards, down from nearly 60 percent in the first quarter.

Getting banks hurt by the financial crisis to boost lending is critical to a sustained economic recovery.

Demand for prime mortgages has begun to revive, posting its first increase in the January-March quarter since the Fed began to track those loans separately in April 2007.

The uptick in mortgage demand comes as rates rose last week. Rates on 30-year home loans remained above 5 percent, at 5.29 percent, after reaching a record low earlier this year.

The Fed survey was based on the responses of 55 domestic banks and 23 U.S. offices of foreign banks.

Most of the banks polled expect their standards for all types of loans to remain tighter than average levels over the past decade through at least the second half of 2010. For businesses and families with tarnished credit, that is expected to continue into "the foreseeable future" for many banks, the Fed reported.

In other lending, around 45 percent of banks surveyed said they tightened standards on commercial real estate loans over the last three months, down from 65 percent in the previous quarter.

While banks' losses on home mortgages appear to be leveling off, delinquencies on commercial real estate loans remain a hot spot of potential trouble, experts say. Many regional banks hold large numbers of them.

A dramatic example was Colonial BancGroup Inc., a big lender in real estate development that failed and was shut down by regulators on Friday - the biggest U.S. bank to collapse this year with about $25 billion in assets. Montgomery, Ala.-based Colonial was a major lender to developers in Florida and Nevada and was hit hard by the collapse of the real estate market in those states. Its failure is expected to cost the federal insurance fund around $2.8 billion.

The Fed on Monday extended through March 31 the duration of a program intended to spur lending to consumers and small businesses at lower rates, though it said it had no plans to expand the types of loans being made. The Term Asset-Backed Securities Loan Facility figures prominently in the government's efforts to ease credit, stabilize the financial system and help end the recession. Under the TALF, investors use the funds to buy securities backed by auto and student loans, credit cards, business equipment and loans guaranteed by the Small Business Administration.

Commercial mortgage-backed securities, which were added to TALF in mid-June, were extended through June 30 because issuing new securities in that area "can take a significant amount of time to arrange," according to a joint news release from the Fed and the Treasury Department.

Last week, the Fed held interest rates steady at record lows and again pledged to keep them there for "an extended period" to entice businesses and consumers to spend more and nurture an anticipated recovery.

The Obama administration is counting on tax cuts and increased government spending to revive the economy. And it has put forward plans to rescue banks and curb home foreclosures, also key ingredients to turning the economy around.

Lax lending standards during the housing boom allowed some people to buy homes that they couldn't afford. When the boom ended, dragging home values down, foreclosures skyrocketed and banks wracked up huge losses on soured mortgage investments.