Bank Lending Practices

Following are some highlights from the
US gov't Senior Loan Officer Opinion Survey on Bank Lending Practices.

Domestic commercial banks reported a further easing of lending standards and terms for commercial and industrial (C&I) loans and commercial real estate loans over the past three months. At U.S. branches and agencies of foreign banks, in contrast, lending standards and terms for these types of loans were little changed over the same period. On net, domestic banks experienced stronger demand for C&I loans over the past three months, while foreign institutions indicated that demand for business loans was about unchanged. Both domestic and foreign institutions reported stronger demand for commercial real estate loans, on balance. A notable net fraction of domestic respondents reported stronger demand for loans to purchase homes over the past three months, while a small net percentage of banks also experienced a strengthening in demand for consumer loans. On net, credit standards for residential mortgages and consumer loans were about unchanged in the July survey, but a significant proportion of respondents indicated increased willingness to make consumer installment loans.

About one-fifth of domestic institutions reported in the July survey that they had become more willing to make consumer installment loans over the previous three months, a somewhat larger share than in April. However, standards and terms on credit card and non-credit-card consumer loans were reportedly little changed, on net, over the same period. A modest net fraction of banks reported stronger demand for consumer loans in the July survey.

A large majority of respondents reported that their bank had securitized less than one quarter of nontraditional mortgages originated over the past year. These institutions accounted for about one-half of the residential mortgages on the respondents' books. In contrast, three large banks—which accounted for almost 40 percent of the respondents' residential mortgages outstanding—indicated that the share of nontraditional mortgage originations that had been securitized exceeded 75 percent. On balance, a majority of the banks indicated that they were less likely to securitize nontraditional mortgage products than traditional mortgages.

What I find most interesting is that large banks are passing 75% of the trash as soon as they can, perhaps only keeping the very best of it from their most credit worthy customers, but the small institutions were doing the opposite, passing only 25% of the trash on to Fannie Mae and other investors. This should tell you something about the risk being assumed by some of the smaller players. It should also tell you that a minimum of 25% of these loans would not have been written at all had the originators not been able to pass the trash to someone else (Fannie Mae or some other "investor") willing to accept damn near anything in the belief that there is no associated risks with these loose lending standards. I will have some more to say about this in an upcoming article.

Mike Shedlock /Mish
http://globaleconomicanalysis.blogspot.com/