Banks are Slow to Loosen Lending Standards

Over the last two years, the sub prime mortgage meltdown has caused the overall lending standards to become the most restrictive since the Great Depression. As a result, the bail out money and other TARP programs that were designed by the federal government; to provide financial institutions with a way of being able  to begin lending to both businesses as well as consumers.  Yet, banks have not increased their overall amount of lending activity; instead, they have been slow to begin lending again.

According to a survey conducted by the Federal Reserve, they found that the overall amounts of lending have stabilized. This is occurring as the overall amounts of loan losses are decreasing. What happened was; when the financial crisis began many banks begun tightening lending standards by: shortening maturities, increasing credit scores to qualify for different mortgages, requiring greater amounts of collateral and charging higher interest rates. However, in the January survey that was conducted of 55 banks and 23 foreign banks, it indicated that financial institutions were willing to make installment loans to consumers. Yet, the lending standards for both small businesses and commercial real estate projects have remained fairly tight. With, 95% of banks maintaining tight lending standards for commercial real estate mortgages; and 17% of financial institutions increasing the lending standards for prime real estate loans, during the last three months of the year.  As this is occurring, there has been mixed demand for residential mortgages, with 22% of respondents saying that mortgage demand increased; while 29% said demand for mortgages decreased during the last three months of the year.

What all of this shows; is that the economy has passed the critical test of stopping the downward spiral of declining economic growth. However, the recovery is tepid at best, this is because the overall amounts of foreclosures and defaults on a wide variety of loans are slowly starting to mitigate. This is causing, demand to pick up in certain parts of the country, while it is falling in others. In order for the economy to begin experiencing long term economic growth means that stability must first take place. Judging from the Fed survey, it appears as if stabilization is starting to take shape. That being said, the period of stabilization will be longer than other times in the past. This is due to the fact that such large numbers of mortgages and loans defaulted; which has caused many bankers to remain hesitant in increasing the amount of loans that they are making. As a result, it would not be surprising to see such conditions exist for 2010 and into 2011. Once this takes place, the economy can begin to resume normal economic growth, as the overall amounts of negative performing loans have been removed from the records of financial institutions.