The Federal Reserve recently released its quarterly Senior Loan Officer Survey. Broadly, the survey reported a net easing in commercial and industrial (C&I) and residential mortgage lending while commercial real estate (CRE) lending standards remained steady. The Fed also noted that net demand at domestic institutions for both C&I and CRE loans were little changed compared to the previous survey, while residential mortgage net demand remained lower.

The survey also reported that in terms of C&I lending to large and middle-market firms, nearly 16% of respondents had eased their standards in the past three months, while 3.5% of participants reported tightening. The net increase of 12% is just slightly higher than January's 11%.

There was also a slight easing in terms. Specifically, 60% - a notably larger net fraction compared to the previous survey - reported trimming spreads of loan rates over their COF for large and middle-market firms. Additionally, almost 40% indicated they reduced the cost of credit lines.

The easing of credit standards and loan terms was largely attributed to more aggressive competition from other banks or non-bank lenders. This was also the primary reason given in the previous survey.

Not counting normal seasonal variation, 65% of the large respondents reported demand over the past three months was about the same, 19% said it was moderately stronger and 16% stated that it was moderately weaker. In the previous survey, 29% saw moderately stronger demand, while 13% of respondents noted demand was moderately weaker. For those reporting strengthening demand, the primary reasons cited were increased customer investment in plant and equipment and rising M&A financing needs. For those citing weaker loan demand, the primary reason given by customers was an increase in internally generated funds.

In terms of inquiries regarding potential business, there was little change in the current survey versus the previous one. The results showed 61% reported the number has stayed about the same, 25% reported a moderate increase, and 14% saw a moderate decline. This compares to 64%, 27% and 9%, respectively, in the last survey.

In the commercial real estate loan category, credit standards held steady over the quarter versus the previous quarter. According to 84% of respondents, standards remained basically unchanged while 9% reported some tightening and 7% some easing. There was a slight increase in demand for CRE loans - 5% on net. In the previous report, the net increase over the period was 3.6%.

In terms of residential mortgage lending, 87% of respondents noted their credit standards were basically unchanged in the past three months, 11% noted some easing while 2% reported some tightening. The previous survey was balanced between those reporting easing and tightening at 8%, for a 0% net. Demand was improved from the previous report with 17% recording it as moderately stronger, compared to 2% previously. The results showed that 39% reported moderately weaker demand and 2% reported substantially weaker demand. This is down from 42% and 4%, respectively, in the January survey. While demand on net remained weaker in the current survey, it was an improvement from the last report.

The results of the report are seen as positive for the mortgage market given that lending demand on net has been steady to lower in C&I and CRE loans while growth is being recorded in deposits and assets. This suggests that banks should continue adding MBS faster than the underlying MBS market is growing, according to analysts at Bear Stearns.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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