The Fed funds rate is at 3% and probably headed lower, but that doesn’t mean it’s going to be easier for businesses and consumers to start borrowing again.
Yesterday the Federal Reserve released its January 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices. The Fed surveyed 56 domestic and 23 foreign banks concerning business and consumer loan demand. Since the Fed’s last survey in October 2007, one third of the domestic banks surveyed have tightened their lending standards for commercial loans. 80% of domestic banks surveyed tightened commercial real estate loans since October – the highest since 1990 (when the question was first asked). Businesses have reduced their requests for loans as well. Loans to finance inventories, and invest in plant and equipment are down from October. The survey finds that 70% of domestic and foreign banks cited a decrease in customers’ needs for M&A financing as a reason for lower commercial loans.
On the consumer side, 55% of domestic banks tightened their lending standards on prime mortgages, up from 40% since October. More than half of domestic banks said that demand for prime mortgages has weakened since October. Of the 39 banks that originate nontraditional mortgages, 85% said they have tightened their lending standards since October. 70% of the banks reported weaker demand for nontraditional and subprime mortgages since then. Tightening has extended into approving applications for home equity lines of credit as well, according to 60% of the domestic banks surveyed; 35% reporting weaker demand since October.
One third of domestic banks have tightened their standards on all types of consumer loans, with 35% of the banks reporting weaker demand for them. Credit cards are not immune either. 10% of banks surveyed have tightened their standards for approving new card applications, double from October. Approval rates have dropped to 32% of applicants from 40% a year ago. In addition to requiring higher credit scores, banks and card companies are issuing new cards with lower credit limits, higher minimum payment due, and higher penalty fees.
One thing not being widely reported by the press is the Fed’s proposed rule to amend Regulation Z (Truth in Lending). The Fed’s proposals are currently in a public comment period until April. The biggest change to Reg Z is that it would “prohibit a lender from engaging in a pattern or practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.”
The reality is that the biggest beneficiary of the Fed’s rate cuts is the banks. Lower interest rates have widened the spread between the interest rate banks pay savers and the interest rate they charge borrowers. Very few consumers are benefiting. It is only the most creditworthy consumers that banks will try to attract with lower mortgage rates. Other consumer credit rates remain high for all.