Banks tightening standards for subprime loans

updated 4:13 p.m. ET Aug. 13, 2007

WASHINGTON - A majority of the nation’s banks have tightened lending standards on subprime mortgages, the Federal Reserve said Monday in a survey that provided further evidence of the spreading problems in mortgage lending.

The Fed said it found that 56.3 percent of banks responding to a survey reported that they had tightened their lending standards for subprime mortgages, loans offered to borrowers with weak credit histories.

The survey found that 40.5 percent of banks responding said they had tightened loan standards for so-called nontraditional mortgages. The Fed defines this category as adjustable-rate loans with multiple payment options, interest-only mortgages and products referred to as “Alt-A” loans that offer such features as limited verification of incomes.

The Fed survey found that even on prime loans, which offer traditional payment options such as 30-year mortgages to borrowers with strong credit histories, 14.3 percent of the banks responding said they had tightened their lending standards “somewhat.”

The Fed’s latest quarterly survey of bank loan officers found them responding to growing troubles in subprime mortgage lending. The Mortgage Bankers Association reported recently that the percentage of subprime loans that were 30 or more days past due climbed to 15.75 percent in the first three months of this year, a record high and up from 14.44 percent in the final three months of last years.

The crisis in subprime lending has sent shock waves through other parts of the financial system and caused big drops in the stock market in trading last week as investors worried about whether an expanding credit crunch could do serious harm to the overall economy.

The Fed joined with other central banks around the world to add extra money to the banking system in an effort to bolster confidence.

The crisis in subprime lending reflects an overall slump in the housing market following a boom period in which sales and home prices had both soared.

With sales now falling and prices stagnant, potential buyers are having trouble getting loans because of tighter lending standards, a development that many economists fear will make the housing slump even worse.

The Fed survey said that 38 percent of the banks responding had reported weaker demand for traditional mortgages, while 44 percent of the banks that offered subprime loans reported weaker demand for those loans.

The Fed last week kept a key interest rate unchanged while noting tighter credit conditions for some households and businesses.

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