The Federal Reserve yesterday reported that the credit crunch is worsening despite the central bank’s best efforts to contain it, spreading from mortgages of all types to consumer and business loans in the last quarter.
The difficulty of getting loans was at or above record levels in nearly every category, the Fed said. To keep the credit crunch from spreading further, the central bank only last week announced steps to infuse cash directly into the student loan, car loan and credit card markets.
Yet a survey in April found that about 55 percent of banks reported imposing tougher standards on business loans, up from about 30 percent in the previous survey in January. And about 30 percent of domestic banks — up from around 10 percent — reported that they had tightened their lending standards on credit card loans.
Meanwhile, people seeking mortgages faced extraordinarily high hurdles despite the Fed’s strenuous efforts since December to encourage bank lending by injecting cash directly into stricken mortgage markets. Nearly two-thirds of banks surveyed had tightened lending standards on traditional, prime mortgages, with 15 percent saying those standards had been tightened considerably.
The tightening of credit also comes despite legislation enacted in February to increase the availability of jumbo loans of more than $417,000 by allowing Fannie Mae and Freddie Mac to buy them. The market for such loans all but dried up after the credit crisis broke out in August.
House Financial Services Committee Chairman Barney Frank complained that the mortgage industry has done little to make the higher-value loans available, while jumbo loans that are being made continue to have interest rates that are a full percentage point higher than conventional 30-year loans.
“I am disappointed,” he said in response to an audience question after a speech to a Mortgage Bankers Association convention in Boston. “We fought very hard to raise the loan limits for Fannie and Freddie, and there have been a lot of problems in implementation.”
The Massachusetts Democrat said he called a hearing for May 21 to “try to unstick” loans made under the new rules covering jumbo mortgages. “There is a chain of people blaming each other, and we’re going to call everybody in there into the hearing and find out why.”
Besides jumbo mortgages, the Fed survey found that banks are making it harder to get other nontraditional mortgages or “Alt-A” loans given to people who supplied only limited income verification. The survey found that about 32 percent of the banks responding to the survey had tightened “considerably” their standards for nontraditional mortgages and another 43 percent had tightened standards in this category “somewhat.”
The survey found that only nine banks are currently making loans in the subprime category and of that group, 78 percent had tightened lending standards.
Congress sought to remove the stigma on jumbo loans by raising the cap on mortgages that Fannie and Freddie can purchase or guarantee, from $417,000 to $729,750 in high-cost markets like Boston, Washington and San Francisco. The change was temporary and will only be in effect through the end of the year.
The goal was to spark investor demand and drive down the elevated interest rates on the loans. Before the credit crisis, the rates on jumbo loans averaged only a quarter-point above conventional loans. But the impact has been muted as investors remain wary of potentially risky mortgage securities, even if they are linked to Fannie and Freddie.
Jay Brinkman, chief economist for the Mortgage Bankers Association, said Wall Street investors have been cautious because they haven’t determined how to assess the risks on the loans and properly price jumbo mortgage securities.
“You don’t want to guess on the low side,” he said. “If you make a mistake in this environment … you can take a serious price hit.”
He also said mortgage lenders and investors need time to adjust to regional differences in the loan amount that Fannie and Freddie can guarantee under the new jumbo rules, depending on what area a borrower lives in. A standard nationwide cap would have been easier for the industry to adapt to, he said.
Another problem is that jumbo loans guaranteed under the newly enlarged caps aren’t being sold in a key secondary market. Mortgages above the conforming loan limit of $417,000 will not be allowed to be blended into packages of other loans traded in the market. The rationale is that these larger loans carry greater risks and would thereby push up prices for securities tied to conforming loans.
• This story is based in part on wire service reports.
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