Senior Loan Officer Opinion Survey: July 2005

July 2005

The July 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices

The July 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months. The survey also queried banks about their current holdings and recent originations and securitizations of nontraditional mortgage products. This article is based on responses from fifty-four domestic banking institutions and twenty U.S. branches and agencies of foreign banks.

Domestic commercial banks reported a further easing of lending standards and terms for commercial and industrial (C&I) loans and commercial real estate loans over the past three months. At U.S. branches and agencies of foreign banks, in contrast, lending standards and terms for these types of loans were little changed over the same period. On net, domestic banks experienced stronger demand for C&I loans over the past three months, while foreign institutions indicated that demand for business loans was about unchanged. Both domestic and foreign institutions reported stronger demand for commercial real estate loans, on balance. A notable net fraction of domestic respondents reported stronger demand for loans to purchase homes over the past three months, while a small net percentage of banks also experienced a strengthening in demand for consumer loans. On net, credit standards for residential mortgages and consumer loans were about unchanged in the July survey, but a significant proportion of respondents indicated increased willingness to make consumer installment loans.

In response to a set of special questions on nontraditional mortgage products, domestic banks generally reported that such loans accounted for less than a quarter of their residential mortgage originations and of the mortgages on their books. More than one-half of respondents, however, noted that the share of mortgage originations accounted for by nontraditional mortgage products had been higher over the past twelve months than over the previous twelve-month period.

C&I Lending
(Table 1, questions 1-6; Table 2, questions 1-6)

In the July survey, domestic banks reported a further net easing of standards and terms for C&I loans. About 15 percent of respondents, on net, reported having eased their credit standards for loans to large and middle-market firms over the past three months, a slightly lower net fraction than in recent surveys. On balance, 50 percent of domestic banks indicated that they had reduced the costs of credit lines for such firms in July, up from 40 percent in the April survey. About 45 percent--a somewhat smaller net percentage than in the previous survey--reported that they had narrowed spreads of loan rates over their cost of funds. Domestic respondents also reported having eased other lending terms over the past three months: More than one-fifth of banks, on net, increased the maximum size and the maximum maturity of credit lines they are willing to extend to large and middle-market firms. In contrast, U.S. branches and agencies of foreign banks--customers of which are likely to be larger firms--indicated that their lending standards and terms for C&I loans were little changed over the past three months. For C&I loans to small firms, 11 percent of domestic banks, on net, noted that they had eased their lending standards--down from almost 25 percent in April--and about one-third of respondents reported having trimmed spreads of loan rates over their cost of funds.

As in recent surveys, almost all domestic banks that reported having eased their lending standards and terms in the July survey cited more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. Large fractions of those respondents also cited an increased tolerance for risk and a more favorable or less uncertain economic outlook as reasons for their move toward a less-stringent lending posture.

Demand for business loans reportedly strengthened over the past three months. Forty percent of domestic banks saw stronger demand for C&I loans from large and middle-market firms, on balance--about the same share as in the April survey. In contrast, foreign institutions reported that demand for C&I loans was about unchanged over the past three months. About one-third of domestic respondents also experienced stronger loan demand from small firms. As was the case in the April survey, a large majority of the domestic respondents that saw stronger loan demand pointed to borrowers' increased financing needs for accounts receivable and inventories as well as for investment in plant and equipment as having driven the rise in demand. A substantial fraction of domestic banks also pointed to a rise in merger and acquisition activity as having boosted demand for C&I loans. Regarding future business, 27 percent of domestic and 16 percent of foreign respondents, on net, indicated that inquiries from potential business borrowers had increased over the past three months, down from about 40 percent and 20 percent, respectively, in the April survey.

Commercial Real Estate Lending
(Table 1, questions 7-8; Table 2, questions 7-8)

On net, 13 percent of domestic banks reported an easing of lending standards on commercial real estate loans over the past three months, about half the fraction that did so in the April survey. Only one of the thirteen foreign branches and agencies active in commercial real estate lending reported having eased standards for this type of loan. Almost one-fourth of domestic respondents, on net, experienced an increase in demand for commercial real estate loans over the past three months, about the same share as in the April survey. On net, 15 percent of foreign institutions indicated that demand for this type of loan had increased, down from one-third in April.

Lending to Households
(Table 1, questions 9-24)

About one-fifth of domestic institutions reported in the July survey that they had become more willing to make consumer installment loans over the previous three months, a somewhat larger share than in April. However, standards and terms on credit card and non-credit-card consumer loans were reportedly little changed, on net, over the same period. A modest net fraction of banks reported stronger demand for consumer loans in the July survey.

Credit standards on residential mortgage loans were reportedly unchanged in the July survey. Demand for mortgages to purchase homes strengthened over the past three months: One-fifth of domestic respondents, on net, reported stronger demand for such loans.

The July survey included a set of special questions on banks' current holdings and recent originations and securitizations of residential mortgages that could be categorized as nontraditional mortgage products. These products include--but are not limited to--adjustable-rate mortgages with multiple payment options, interest-only mortgages, and so-called "Alt-A" products, such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties.

About one-third of domestic respondents indicated that the share of residential mortgages on their books that could be classified as nontraditional mortgage products was less than 5 percent, and another third reported that the share of such products was between 5 percent and 15 percent. These shares are roughly similar if the responses are weighted by the respondent banks' dollar volumes of residential mortgages outstanding at the end of the first quarter. Only one bank indicated that nontraditional mortgage products accounted for more than one-half of residential mortgages on its books.

About one-third of domestic respondents reported that over the past twelve months the share of their residential mortgage originations that could be categorized as nontraditional products had been less than 5 percent. An additional 41 percent of respondents indicated that their share of nontraditional mortgage originations was between 5 percent and 25 percent over the same period. Banks reporting shares in this range accounted for 72 percent of all residential mortgages on the books of the respondents at the end of the first quarter, with the largest of them reporting shares between 16 percent and 25 percent.

More than one-half of respondent banks indicated that the share of nontraditional residential mortgage originations over the past twelve months was higher than it had been over the previous twelve-month period. Twelve percent of respondents noted that this share was substantially higher.

A large majority of respondents reported that their bank had securitized less than one-quarter of nontraditional mortgages originated over the past year. These institutions accounted for about one-half of the residential mortgages on the respondents' books. In contrast, three large banks--which accounted for almost 40 percent of the respondents' residential mortgages outstanding--indicated that the share of nontraditional mortgage originations that had been securitized exceeded 75 percent. On balance, a majority of the banks indicated that they were less likely to securitize nontraditional mortgage products than traditional mortgages. However, three large institutions--which accounted for almost 40 percent of the residential mortgages of the respondents--indicated that they were somewhat more likely to securitize nontraditional mortgage products.

Banks were also asked about the share of residential mortgages on their books used to finance purchases of second homes or homes for investment purposes. A substantial majority of banks indicated that this share was less than 10 percent. Banks with larger mortgage portfolios reporting in this range generally reported higher proportions of such mortgages. Most respondents also indicated that over the past year, the share of residential mortgage originations used to finance purchases of second homes or homes for investment purposes was less than 10 percent. One-fourth of the respondents noted that the share of originations accounted for by such loans was moderately higher over the past twelve months than in the previous twelve-month period. Banks with larger mortgage portfolios were more likely to report an increase in this share.

This document was prepared by Fabio Natalucci with the research assistance of Arshia Burney and Jason Grimm, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.