Domestic banks are making loans more readily available, easing lending policies to businesses as competition stiffens and relaxing standards on mortgages as demand for home loans cools, a Federal Reserve survey shows.
“Banks eased their lending policies for commercial and industrial loans” as well as standards on prime residential mortgage loans in the third quarter, the central bank said in its survey of senior loan officers released today in Washington. The share of banks relaxing mortgage standards was described as “modest.”
The survey shows banks are more willing to extend credit as the central bank keeps interest rates near zero and maintains the pace of asset purchases intended to stoke growth. The Federal Open Market Committee last week said it will press on with $85 billion in monthly purchases while awaiting “more evidence that progress will be sustained.”
Banks reported “on net, weaker demand for prime and nontraditional mortgage loans” while demand for business loans “experienced little change,” according to the report. For other types of lending to consumers, banks “did not substantially change standards or terms.”
The survey also asked a series of questions about how banks have responded to the increase in mortgage costs, which climbed from as low as 3.35 percent in May for a 30-year fixed-rate mortgage to as high as 4.58 percent in late August, according to a Freddie Mac index.
Rates on home loans rose on speculation that the Fed would start curbing purchases of Treasuries and mortgage debt. The central bank unexpectedly kept the pace unchanged in September, helping to push borrowing costs lower and fueling gains in the stock market.
The Standard & Poor’s 500 Index climbed 0.4 percent to 1,767.93 at the close of trading in New York. The yield on the 10-year Treasury note fell two basis points, or 0.02 percentage point, to 2.60 percent at 5:09 p.m. in New York.
Mortgage refinancing dropped at almost all banks, and “large fractions of banks indicated that they had reduced the processing time for home-purchase loan applications and had increased their marketing of home-purchase loans to potential borrowers,” according to the survey. Very few banks reduced origination and processing fees, or minimum down-payment standards in response.
The mortgage market is closely watched by the Fed, as the central bank’s low interest-rate policies are designed to spur borrowing, especially for houses and automobiles that many consumers finance with loans.
“Monetary policy in the United States is likely to remain highly accommodative for some time,” Fed Governor Jerome Powell said today in a speech in San Francisco. “The timing of this moderation in the pace of purchases is necessarily uncertain, as it depends on the evolution of the economy.”
Banks are seeing increased demand for loans for construction and land development, multifamily residential structures and nonresidential structures, according to the Fed report. The share seeing increased demand was described as “moderate.” Banks were more likely to ease their standards for these types of loans than tighten them, the report said.
Kelly King, chairman and chief executive officer of BB&T Corp., described competition in the market for commercial real estate lending as “intense” in an Oct. 17 earnings call.
“Everybody’s going after loans wherever they can find them,” said King, whose bank is based in Winston-Salem, North Carolina. “We have an appetite to increase our CRE, but we do not have an appetite strong enough to take on too much risk at the extraordinarily low prices.”
The total value of loans at U.S. banks climbed 2.5 percent during the past year to $7.33 trillion in September, according to a Fed report last week. Lending to businesses has been particularly strong, with commercial and industrial loans climbing to $1.58 trillion in September, an 8.2 percent increase from a year earlier.
The gains in lending haven’t translated into broad-based growth. Economists in a Bloomberg survey estimate the economy expanded 2 percent in the third quarter, down from 2.5 percent the previous quarter. The Commerce Department plans to release its initial estimate of third quarter growth at 8:30 a.m. on Nov. 7.
Employers added 148,000 jobs in September, down from 193,000 the month before, and economists estimate the pace will slow further in October to 120,000. The unemployment rate probably rose to 7.3 percent in October from 7.2 percent in September, according to a Bloomberg survey of economists, a sign of the harm to the economy from a 16-day government shutdown last month.
The Fed survey of loan officers, conducted from Oct. 1 to Oct. 15, is based on responses from 73 domestic banks and 22 U.S. branches and agencies of foreign banks. The Fed doesn’t identify the banks.
The central bank last week announced its latest steps to strengthen the banking system through a new annual round of stress tests. The largest 30 banks will have to show they can weather a recession in which house prices plunge 25 percent, stocks fall 50 percent and unemployment climbs to 11.3 percent.
The banks will also have to demonstrate their ability to continue lending in a scenario where the 10-year Treasury note yield jumps to 5.75 percent by the end of 2014, and corporate borrowing and mortgage rates also rise.
The central bank has also tried to improve the flow of credit by holding its target interest rate near zero since 2008, undertaking three rounds of bond purchases and increasing its surveillance to ensure banks could lend during a severe downturn.