More Banks Stiffen Rules, Fed Finds

By Jeannine Aversa
Associated Press
Tuesday, February 5, 2008

Many U.S. banks have made it harder for creditworthy borrowers to obtain a mortgage, according to a Federal Reserve survey released yesterday that underscored the spread of the credit crisis.

"About 55 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages," the Fed survey said. The previous survey, released in November, found that 40 percent of U.S. banks had tightened standards.

Problems that surfaced in the market for subprime mortgages have spread to more creditworthy borrowers. Defaults and foreclosures have soared to record highs.

About 60 percent of domestic banks responding to the survey indicated they had tightened their standards for approving applications for revolving home equity lines of credit over the past three months, the Fed said.

The Fed's survey found that banks have tightened lending standards on a range of mortgages, along with those for businesses.

Banks had to respond by Jan. 17. That was before the Fed, citing a worsening credit crunch, became more aggressive in cutting its key interest rate.

The Fed last week lowered its key rate by half a percentage point. Just eight days earlier, the Fed in an emergency session slashed its key rate by a rare three-quarters of a percentage point. Fed Chairman Ben S. Bernanke convened that meeting after stocks plunged worldwide, intensifying fears that the United States was heading toward its first recession since 2001. The two cuts together represent the Fed's most intensive rate reductions in two decades.

The survey also found that "large majorities of domestic and foreign banks expect a deterioration in loan quality in 2008" affecting both business and consumer loans, the Fed said.

The survey was based on responses from 56 domestic banks and 23 foreign banking institutions.

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