The Federal Reserve Board released their “ July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices” and it is clear that more and more banks are tightening their lending standards.
In simple terms, this means that it is harder than it has been in recent memory to get approved for a mortgage loan.
A few highlights from the study:
Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of domestic respondents—up from about 60 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages.
Of the 32 respondents that originated nontraditional residential mortgage loans, about 85 percent—up from about 75 percent in the April survey—reported having tightened their lending standards on such loans.
About 80 percent of domestic respondents—up from about 70 percent in the April survey—noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the past three months.
According to the study, it can be expected that even more tightening will happen with regards to lending standards through the rest of 2008 and into 2009:
On the household side, about 45 percent of domestic respondents noted that they expected their banks to tighten lending standards on prime residential mortgage loans in the second half of 2008, and about 30 percent, on balance, thought that they would tighten standards on those loans in the first half of 2009.
And it is not just mortgages that lenders are tightening up their lending guidelines — lenders have recently tightened credit card lending standards:
About 65 percent of domestic banks—up notably from about 30 percent in the April survey—indicated that they had tightened their lending standards on credit card loans over the past three months.
What does all of this mean for someone who is considering getting a mortgage between now and the end of the year?
Don’t expect it to get any easier and Tom Vanderwell does a nice job of highlighting 3 things that you may expect from these tightening lending standards.