Banks Are Still Tightening Mortgage Standards

Mortgage delinquencies have been rising rapidly for the last two years. Not surprisingly, banks have been tightening their standards for new mortgages. Take a look at the chart, below, which shows the net percentage of banks that tightened credit standards for residential mortgages in each quarter.

The chart was derived from the Federal Reserve's quarterly survey of senior loan officers. The survey asks, among other things, if banks tightened or loosened credit standards during the current quarter. The numbers in the chart were calculated by subtracting the percentage of banks that loosened standards from the percentage of banks that tightened standards.

Banks have gone through cycles of loosening and tightening in the past, but the current cycle is unprecedented. Beginning in the fourth quarter of 2006, banks began tightening credit, reaching a peak level of activity in the third quarter of 2008. At that point, roughly 75% of banks were tightening credit standards for mortgages.

In some senses, the panic has receded. In the most recent survey, only 24% of banks said that they were tightening standards. It's important to interpret the chart correctly, however. It does not indicate that credit standards are actually loosening, only that fewer banks are still tightening. (Only 2% of banks actually relaxed their lending standards during the current quarter. That's the first time in a year that any survey respondent has relaxed its standards.)

The continuing clamp-down on mortgage standards probably explains why record-low mortgage interest rates have not had a larger impact on housing prices. It may also provide a clue about when the housing market will recover. The last time that the housing market went from boom to bust, prices didn't bottom out until the mid-1990's, long after banks had begun loosening credit standards.