Last week, the Federal Reserve released its quarterly Senior Loan Officer Survey. The trends remained mostly similar to the previous report released in January.

"Overall, the respondent banks reported mixed changes in lending standards and terms over the past three months and somewhat weaker demand for most loan types," the report said. Regarding mortgage loans, the survey did separate out prime, nontraditional and subprime loans. The survey suggests that respondents have tightened up their standards for making nontraditional and subprime loans.

Over the surveyed quarter, nearly 89% of large bank respondents (those with annual sales of $50 million or more) said credit standards for approving applications for C&I loans or credit lines were little changed from the previous quarter. This compares with 92% in the January survey. The percentage of those reporting slight easing increased to 11% from 5%.

Regarding loan terms, large banks reported a slight easing in all categories on average. Reasons for the easing of credit standards appear to be related to improvement in industry-specific problems, more aggressive competition from other banks or nonbank lenders, and increased liquidity in the secondary market for these loans.

In terms of demand for C&I loans (apart from normal seasonal variations), large bank respondents reported an increase in the "moderately weaker" category at 36% compared with 22% previously. The primary reasons cited for the weaker loan demand appear to be an increase in customers' internally generated funds and a decrease in customer M&A financing needs.

The last question was about the inquiry interest from potential borrowers over the quarter. There was an increase in the number of large bank respondents noting that the number of inquiries had decreased moderately (nearly 31% in the April survey versus 16% in the January survey). Those reporting that the number of inquiries had held steady declined to 56% from 70% previously.

Commercial real estate

The report showed that credit standards for commercial real estate loans had remained basically unchanged from the previous survey. For example, the percentage of those reporting that standards had "tightened somewhat" was nearly 28% in the April survey, down from 32% in January, while 67% reported that standards had "remained basically unchanged," compared with 60% previously, and less than 6% reported that they had "eased somewhat" compared with 8% in the last survey.

Overall, demand for CRE loans over the past three months has held steady or been slightly weaker. The survey said 56% of large banks reported demand as about the same compared with 54% previously; 39% reported demand moderately weaker, a decline from 41%; and nearly 6% said demand was substantially weaker, an increase from 3% in the last survey.

In this survey, the Federal Reserve divided loans into the categories of prime, nontraditional, and subprime for answering the questions. Regarding credit standards, 86% of large bank respondents said credit standards on prime mortgage loans were basically unchanged and 14% said they had tightened somewhat.

In the nontraditional category, 43% responded that standards remained basically unchanged, 40% said they had tightened somewhat; and 17% reported that they had "tightened considerably."

In the subprime category, 56% of large banks said that their credit standards had tightened considerably, 11% said standards had tightened somewhat; and 33% said standards remained basically unchanged. In the January survey, there was no separation of loan types. However, no large banks responded that their credit standards had "tightened considerably."

When queried about the demand for mortgages to purchase loans, 53% of large bank respondents said it was about the same for prime loans as during the last survey, 31% said it was moderately weaker and 6% said it was substantially weaker. Meanwhile, 11% reported moderately stronger demand.

In the nontraditional category, 43% reported about the same, 33% said it was moderately weaker and 20% said it was moderately stronger.

In the subprime category, 44% said it was about the same, 33% said demand was moderately weaker, 11% said it was substantially weaker and 11% reported it was moderately stronger. In the previous survey, no large banks reported for the "substantially weaker" demand category.

- Sally A. Runyan/Thomson IFR MortgageData

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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