Banks Tightening Standards for All Home Borrowers

Source: Federal Reserve October Survey

The NAR has been trying to put a good spin on the bad news the organization has been forced to report since the housing downturn began. They have called the bottom no less than five times and made one preposterous claim after another in a desperate bid to convince potential homebuyers that housing is still a good investment.

In an October 24 press release titled Mortgage Availability Improving But Hampered September Existing Home Sales, the NAR blamed September's slow sales on troubles in the mortgage market. Senior economist Lawrence Yun insisted in the press release that the worst was over and that mortgage availability had 'markedly improved' in recent weeks.

The truth is that there has been an unprecedented tightening in lending standards at major banks. According to the most recent Federal Reserve survey of banks, conducted in early October, residential mortgages are now harder to get than at any other time in the 17-year history of the survey.

The surveyed banks include the nation's largest institutions and account for 75 percent of the residential real estate loans issued by commercial banks. Responding banks reported that lending standards tightened considerably for all home borrowers regardless of the type of loan.

Sixty percent of the banks that offer non-traditional mortgages, such as interest only or Alt-A (low documentation) loans, tightened lending standards. The figure is up 20 percent from the July survey.

Only nine of the 49 banks surveyed still offer subprime mortgages. Of the nine, five clamped down on borrowers considerably, while four left standards unchanged.

The biggest surprise involved changes for prime loans, which are given to borrowers with the best credit. In July, only 15 percent of banks had tightened standards on prime loans. In October, the figure was up to 41 percent, the largest increase on record. Jumbo prime loans (above $417,000) are also tougher to get-50 percent of banks reported tighter standards and fewer originations.