Survey finds tighter credit policies, weaker loan demand among banks

Federal Reserve's quarterly survey sees banks report reduced risk tolerance

Banks reported tighter standards and a downtick in demand for real estate loans over the past three months in the Federal Reserve’s April 2024 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices.

Participating institutions generally indicated a reduced tolerance for risk across the board, broadly impacting both residential and commercial real estate lending to varying degrees.

On the residential side, lending standards remained basically unchanged for qualified (QM) jumbo mortgages, government mortgages, and mortgages eligible for purchase by Fannie Mae and Freddie Mac. However, a modest net share of banks indicated that they tightened standards for non-QM loans (including non-QM jumbo), subprime loans and qualified non-GSE mortgages. A moderate net share of banks also reported stricter lending standards for HELOCs.

Notably, depositories of different sizes diverged on their credit strategies during the first quarter. While other banks tightened their lending criteria for most residential real estate loan categories, large banks actually reported a net easing of standards to open the year.

Banks also reported weaker demand for all categories of residential lending over the first quarter. The Fed noted that while a moderate net share of banks reported weaker demand for most residential loan types, a significant net share of banks reported weaker demand for subprime and non-QM mortgages.

Regarding commercial real estate (CRE) lending, the SLOOS found a significant net share of banks tightening standards for all types of CRE loans of all sizes, though such tightening was more widely reported by other banks than by large banks. A moderate net share of banks indicated weaker demand for construction and land development loans, with a significant net share of banks seeing weaker demand for multifamily property loans and loans secured by nonfarm nonresidential properties.

The most widely reported change in terms for CRE loans was the widening of interest rate spreads on loans over the cost of funds. Substantial shares of banks also said they tightened maximum loan sizes, lowered loan-to-value ratios, increased debt service coverage ratios and shortened interest-only payment periods for all commercial loan types.

The most cited reasons for tightening credit policies for commercial lending over the past year — cited by almost all banks — included the less favorable or more uncertain outlook for commercial rents; vacancy rates; and property prices. The most cited reasons for weaker demand included increasing interest rates; a decrease in customer acquisition or development of properties; and a less favorable or more uncertain customer outlook for rental demand.


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