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.

About 40% of banks tightened standards for commercial and industrial loans (C&I) to both large and middle-market firms, down from 65% in January. Banks cited the less favorable economic outlook, reduced tolerance for risk and worsening of industry-specific problems as reasons for tighter standards.

Banks tightened lending standards for the already-credit-starved mortgage market. About 49% of banks tightened standards for prime mortgages while 64% tightened for non-traditional mortgages. The survey did not indicate lending standards for subprime mortgages since there was virtually no origination. On a positive note, about 35% of banks reported stronger demand for prime residential mortgages.

About 66% of banks tightened lending standards for commercial real estate loans. Banks have been steadily tightening standards since early 2006, implying an incredibly difficult credit environment.

The percent of banks which tightened standards for credit card loans held close to 58% for the third consecutive survey. There was a small decline - to 47% from 28% - in the share of banks which tightened standards for auto loans. Demand for consumer loans continued to fall, but at a slower pace than in January. On a somewhat encouraging note, only 5% of banks indicated they had become less willing to make consumer loans over the previous three months, down from 16% in January. While credit conditions are still bleak, there are signs that banks are slowly becoming more willing to lend.

Banks were also asked about their outlook for loan quality this year. About 90% expect loan quality to deteriorate for nontraditional mortgages, credit card loans and commercial real estate loans.