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Fed: Mortgage, Loan Demand Weakens

Demand for mortgages and consumer loans weakened at U.S. banks in recent months, while competition forced banks to ease terms for commercial real estate loans, a Federal Reserve survey released on Wednesday found.

"On net, 44 percent of domestic banks reported weaker demand for mortgages to purchase homes, a notably larger fraction than in the October survey," the Fed said in its quarterly survey of senior loan officers.

Banks reported an easing of lending standards and terms for commercial and industrial loans and no change in lending standards — in fact some tightening of standards — for commercial real estate loans over the past three months.

At the same time, banks told the Fed that they had eased some terms for commercial real estate loans in the face of aggressive competition.

The Fed's survey was based on responses from 56 domestic banks and 19 foreign banking institutions.

Banks said they expect loan quality on loans to businesses and households to deteriorate in 2006 from current high levels. Around 40 percent of domestic banks said they expect the quality of their nontraditional mortgages, which include interest-only loans, to decline.

Bank regulators have recently cautioned banks on risks associated with commercial real estate lending and nontraditional mortgages.

A notable percentage of banks reported stronger demand for commercial and industrial loans from large and middle-market firms. Banks experiencing stronger demand for commercial and industrial loans cited mergers and acquisitions and increased needs to finance investment in plants, equipment, and inventories.

At the same time a small percentage of domestic institutions experienced increased demand for commercial real estate loans.

Many banks reported that they had eased some terms for commercial real estate loans. That pattern is consistent with improving conditions in commercial real estate markets and the rapid expansion of commercial real estate loans in 2005, the Fed said.