Lacker and Hoenig (two relatively hawkish FOMC officials) yesterday warned that Fed balance sheet must at some point be curbed

Fed’s Senior Loan Officer Survey revealed tight lending standards and weak demand, with the exception of prime mortgages; however C&I lending standards are no longer being tightened so aggressively

The Fed’s Senior Loan Officer Opinion Survey (SLOOS) revealed that banks kept lending standards tight for virtually all credit products over the past three months. However, while banks continued to tighten lending standards, the rate slowed for most products relative to January, but no banks eased lending standards. The one encouraging piece of news is that demand for prime mortgage increased for the first time in two years. Demand for other loans remained weak.

Visa has announced that spending on debit cards in the US has passed credit for the first time in history. For the period ending December 31, 2008, debit payment volume was $206 billion with credit payments at $203 billion. Consumers are going on a credit diet and in this new era of frugality, they would rather use their own funds to focus on household budgeting and cost control.

Bankruptcy filings surge
Consumer bankruptcy filings rose in April, according to the American Bankruptcy Association. Consumer filings jumped 3.5% MoM in April to 125,618. This marks the fourth consecutive monthly increase in consumer bankruptcy filings, over which time they have been up nearly 50%.

And, as a sign of how widespread the housing meltdown is, turn to page A12 of today’s Wall Street Journal, “Foreclosure Trouble Spreads to Those Who Bet the Farm”. The home foreclosure crisis started in cities and suburbs and has now widened its reach into rural America. According to the WSJ, default rates are soaring across rural America, where homeowners were just as vulnerable to subprime loans and often refinanced existing mortgages to take out cash or pay off debts.

Construction spending came in well above expectations, up 0.3% M/M in March led by a 2.0% M/M gain in non-residential construction. An 8.6% rebound in power facilities and gains in lodging, office and commercial space all boosted the headline – the latter three areas look unlikely to be sustained given rising vacancy rates, tighter credit standards and falling demand. Commercial construction growth, which first turned negative in 4Q08 and posted a 44% annualized decline in 1Q09, is likely to be a significant drag on growth over the balance of the year.

Commercial real estate…
One of the key standouts in the Fed’s Survey is the extent to which demand for commercial real estate loans has collapsed. The net percentage of banks reporting weaker demand for commercial real estate loans jumped to 66% in 2Q from 55% in 1Q in what is the weakest showing on record. Meanwhile, the majority of banks continue to tighten their lending standards on commercial real estate loans. Fully 66% of banks tightened standards and, though that is marginally better than the 79% in 1Q, this tells us is that we can expect continued declines in commercial construction in the quarters ahead.

US construction spending surprises on the upside

Construction spending rose 0.3% m/m in March, above expectations. The upward surprise was in private nonresidential construction spending, which rose 2.7% m/m. Notably, construction of commercial real estate rose 1.5%, marking the first gain in nearly a year. Similarly, construction of office buildings and lodging structures edged higher. We believe this is unsustainable given the distressed CMBS market, depressed hotel industry, and overall contraction in business investment. Looking past this month’s data, we believe that the nonresidential construction sector has begun a protracted downturn likely to persist into next year.

The Obama administration released details on the second lien program which is the latest initiative under the Making Home Affordable Program. This is designed to facilitate and increase the success of the first lien modification program. There are two options for second lien holders:

1. Modification: Reduce mortgage rates for five years, after which the rate will step up to the then-current rate on the first lien. For amortizing mortgages, the rate will be reduced to 1% and for interest-only loans to 2%.