By: Mark Lieberman, Five Star Institute Economist
Adding to concerns of a new housing bubble, lenders reported an increase in demand for “non-traditional” and sub-prime mortgage loans and that they’ve responded to that demand by easing standards, the Federal Reserve reported Monday in its quarterly Senior Loan Officer Opinion Survey.
According to the survey, a net 3.1 percent of lenders responding said demand for “non-traditional” residential loans increased from the survey released three months ago and a net 25 percent of respondents said demand for loans from sub-prime borrowers was higher than it was in May.
Almost half (49.3 percent) of lenders surveyed said demand for loans from prime borrowers had increased, up from 39.1 percent in the second quarter survey.
At the same time, a net 6.3 percent of lenders said they had eased lending terms and standards for non-traditional mortgage loans, while a net 25 percent of survey respondents said they tightened standards for loans to sub-prime borrowers.
The survey results are reported as a diffusion index, that is the percentage of respondents saying they are easing lending standards somewhat or considerably is subtracted from those who report they are tightening standards for a range of different lending products.
In the case of “traditional” mortgage loans, a net 7.5 percent of banks reported easing lending criteria. In the second quarter survey, a net 7.8 percent reported easing.
The increase in demand for non-traditional— generally “Alt-A”—loans and from sub-prime borrowers comes as sales of both new and existing-single family homes are generally rising and as both prices and mortgage rates are increasing.
Overall, the quarterly survey showed an increase in demand for most types of loans: commercial real estate loans, commercial and industrial loans from small and large firms (as determined by sales volume) consumer loans, credit card loans, and auto loans as compared to the second quarter report issued in May.
And, banks which have been criticized for creating hurdles for applicants, eased lending standards for all types of loans.
According to the survey, a net 62.5 percent of lenders said they had narrowed spreads for commercial and industrial loans to large and middle-market firms after a net 63.2 percent of lenders reported making such loans less expensive in the second quarter survey. Loans were less expensive for small firms as well with 51.4 percent of lenders narrowing spreads over their own cost of funds after a net 57.8 percent of landers narrowed spreads one quarter ago.
While a net 27 percent of lenders reported stronger demand for auto loans, a net 14.1 percent said they had eased standards for such loans.
In all, 13 percent of banks surveyed reported increased willingness to make consumer loans, down slightly from 22.2 percent three months ago.
Hear Mark Lieberman on P.O.T.U.S. (SiriusXM 124) on Friday at 6:20 am eastern time.
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