Fed Report Bad News: Only Commercial Loans Won't Benefit from Pause in Credit Tightening

Most large banks have stopped tightening standards on a number of loan types, according to a new report from the Federal Reserve. But the central bank’s latest loan officer survey says that while it may not be getting tougher for consumers to borrow, it’s not getting any easier, because financial institutions have yet to unwind the considerable contraction that has built up over the past two years.

Commercial real estate is the only loan type where the majority of banks said they would continue to tighten credit criteria. The lack of financing available in the commercial sector is especially dire, because an estimated one in five commercial mortgages will mature over the next two years. Analysts fear that if property owners are unable to roll this debt into new loans, there could be another real estate calamity.

In response to a special survey question about the quality of commercial and industrial loans on banks’ books in the fourth quarter, banks reported higher delinquency rates on loans to small firms than on those to large and middle-market firms. Nearly 65 percent of respondents indicated higher delinquency rates among outstanding loans to small firms.

For other types of loans, the number of banks reporting tighter loan terms trended lower. In line with this pattern, the Fed said only a small net fraction of banks tightened standards on prime residential real estate loans in the fourth quarter. A somewhat larger percentage of banks--but still fewer than in previous quarters--tightened standards on nontraditional residential real estate loans.

Banks also reported overall decreased demand for commercial property loans, prime residential real estate loans, nontraditional mortgages, and home equity loans, alike. The Federal Reserve’s survey results are based on responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.