The ranks of federally chartered banks making subprime mortgage loans didn’t shrink during the second quarter, but most tightened their standards, and demand for such loans did not grow.

A Federal Reserve survey of senior loan officers at 50 banks found that 16 were still making subprime mortgage loans — the same number reported during a survey in April.

The 16 banks, which also made other types of mortgage loans, accounted for 57 percent of all residential real estate loans on the books of commercial banks as of March 31.

Nine of the 16 banks making subprime loans, or 56 percent, said they tightened their credit standards. One in four banks making subprime loans tightened their standards “considerably.”

About 44 percent of the banks said their standards on subprime loans remained basically unchanged, and none reported easing standards.

On June 29, regulators finalized new guidance for federally chartered banks offering subprime loans. The guidance instructs banks to qualify borrowers at the fully indexed rate, and provide more thorough disclosures of issues like payment shock.

The percentage of banks reporting weakened demand for subprime loans more than doubled from the previous survey, to 44 percent. The remainder of those surveyed, 56 percent, said demand for subprime loans remained about the same during the second quarter.

A total of 42 banks said they made nontraditional loans, such as adjustable-rate mortgages with multiple payment options, interest-only mortgages, and Alt-A loans with limited income verifications.

Federal regulators adopted new guidance for nontraditional loans last fall. Mortgage repurchasers Fannie Mae and Freddie Mac say that beginning Sept. 13 they will no longer buy nontraditional mortgages from lenders who don’t follow the guidance.

Among banks making nontraditional loans, 59 percent said their credit standards remained basically unchanged. About 36 percent said they’d tightened standards “somewhat,” and two banks representing 5 percent of banks making nontraditional mortgage loans said they’d tightened standards considerably.

Only 7.2 percent of banks making nontraditional loans said demand was up, with 64 percent saying demand was unchanged. Twenty one percent said demand was moderately weaker, and 7 percent reported “substantially” weaker demand.

All but seven of the 49 banks making prime mortgage loans said they left their credit standards for those loans basically unchanged during the second quarter. Seven lenders, or 14 percent of the group, said they tightened standards on prime loans “somewhat.”

Most banks reported demand for prime mortgages was weaker or about the same, with 28 percent saying demand was moderately or substantially stronger.

Click here to see a chart of mortgage demand between 1990 and 2007.

Source:

http://inman.com/inmannews.aspx?ID=64211