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 last week 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.
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.