Federal Reserve’s Residential Real Estate Report about Credit Market

With US housing foreclosures making headlines the world over, it should come as no surprise that banks have tightened their lending guidelines for the residential real estate market. 

That being said, the Federal Reserve’s recently-published survey of bankers that specialize in residential real estate reveals some interesting information about the credit market that feeds the residential real estate market. 

Over half – 55% – of the executives that were interviewed have tightened lending standards on just subprime loans, but on prime mortgages as well.  This number was up from about 40% in the October survey, and shows that banks are taking the possibility of a economy-wide downturn very seriously. 

While the 55% number is a dramatic change, over 85% of banks that have been issuing subprime mortgages have tightened their lending standards.  This was an even larger – 20% – increase over the 65% that had reported doing so in the October survey. 

While the banks have, in effect, been reducing the supply of credit to the residential real estate market, they have also been following demand:  Over 60% of domestic banks reported a significant drop off in demand for home equity lines of credit over the past three months.

On net, about 35% of banks reported weaker demand for loans in general.

Interestingly, about a third of domestic banks reported rejecting more applications for credit cards from those with sub-standard credit reports, and 10% reported rejecting more credit card applications in general.  These numbers suggest that housing market woes have begun to effect the all-critical consumer spending numbers via not just the demand side of things, but supply channels like new credit cards, as well.

All told, the Fed’s latest survey of bank executives held some pretty negative numbers in it.  They were not disastrous by any means, but they did bespeak a steadily worsening situation for lenders that focus on residential real estate.  This trend is widespread throughout the banking industry, but is more pronounced among residential real estate lenders.