Last week, the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices. In general, credit standards held fairly stable over the period for C&I loans, commercial real estate and residential mortgage loans, while demand for all three types of loans showed some deterioration.

Credit standards for approving C&I loans were little changed from April, with 80% of large banks reporting that standards were basically unchanged. This was the same percentage reported in the April report. There was a slight increase to 5.7% from 0%, however, in banks that had tightened standards somewhat. At the same time, the terms of the loans, including maximum size and maturity, costs of the credit line, loan premiums, were tightened slightly. One factor - spreads of loan rates over the bank's cost of funds - was eased slightly from April. The primary reasons given for tightening credit standards was a less favorable or uncertain economic environment and reduced tolerance for risk.

C&I loans

The survey showed some weakening in demand for C&I loans (outside of a seasonal variation) from the April report. The latest survey reports that 17% of large banks were seeing moderately stronger demand, 57% were seeing similar, while 26% experienced moderately weaker demand. This compares to 20%, 69% and 11%, respectively, recorded in the April survey. One reason for the weakening demand was the decrease in plant and equipment investment. Meanwhile, large bank respondents reported a slight decline in the number of inquiries from potential businesses for C&I lines. According to the current survey, 63% said the number of inquiries had stayed nearly the same, down from 71% in April, while 17% reported a moderate decrease in inquiries compared to 6% in the previous survey.

Commercial real estate loans

Credit standards for commercial real estate loans showed mixed results from the previous survey. The July survey shows 29% of large bank respondents tightening somewhat versus 9% in the April survey; 60% said standards were basically unchanged compared to 91% previously; however, 11% did report some easing while none reported easing in the April survey. Demand over the period dropped compared to April with 17% of large banks reporting moderately weaker demand compared to 9% in April; 69% said demand was similar versus 71% previously; and 14% experienced moderately stronger demand compared to April's 20%.

Residential mortgage loans

In the past three months, credit standards for mortgage loans were little changed at large banks from the beginning of the year. According to the July survey, 3% of large banks reported some tightening; 80% were basically unchanged; and 17% had eased somewhat. In April, the respective numbers were 3%, 82% and 15%. And given the increase in mortgage rates over the course of the year, it is not surprising that the demand for mortgage loans had decreased. The recent survey reported that 11% of large bank respondents saw substantially weaker demand versus just 3% in April; 63% saw moderately weaker demand versus 44% previously; 20% reported similar demand, down from 41%; and 6% experienced moderately stronger demand compared to 13% in the last survey.

The July quarterly survey queried banks about the percentage of subprime and nontraditional mortgage loans on their books. For subprime loans, 60% of large banks recorded that the share of subprime loans held was less than 5%. Only 5% reported subprime share was over 30%. On the nontraditional side - which includes option ARMs, IO mortgages and Alt-As - 27% of large banks reported less than a 5% share in this type of mortgage; and 21% reported more than 30%. In terms of the quality of the subprime portfolio as measured by delinquencies and charge-offs over the past 12 months, 65% of bank respondents said it was unchanged, and 20% said it had deteriorated somewhat. Relative to bank expectations regarding subprime portfolio experience, 80% reported it was in-line with expectations; 5% said somewhat worse; and 15% said somewhat better.

The survey also looked at the quality of nontraditional mortgages over the past 12 months. The results showed that 83% of large bank respondents said it remained unchanged, while 3% saw some deterioration. On the positive side, 10% saw some improvement, while 3% reported substantial improvement. Meanwhile, 73% of respondents said that performance of the non-traditional mortgage portfolio was in-line with expectations; 20% said it was somewhat better than expected; 3% said it was much better than expected; and only 3% reported it was somewhat worse than expected.

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

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