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Fed Survey Says Cashouts Going For Debt Paydown

Residential lending among bright spots at banks

November 14, 2002


A Federal Reserve Board survey of 55 banks revealed that while the demand for residential loans has remained largely unchanged in the past three months, demand for loans to the commercial and industrial (C&I) sector has taken a dip.

Focusing on changes in the supply of and demand for bank loans to businesses and households, The October 2002 Senior Loan Officer Opinion Survey on Bank Lending asked officials of 55 domestic banks questions about loan activity.

Among other questions, the survey asked officials about demand for C&I and residential loans; about changes in standards for approving C&I loan applications and those for residential mortgage loans; and about residential refinancing activity. Officials were asked to consider normal seasonal variation when taking the survey.

Most officials reported weaker demand in C&I loans in the past three months than before. The question of demand was broken down between:
  • Large and middle market firms, with annual sales of $50 million or more
  • Small firms, with annual sales of less than $50 million

Almost 53% of the officials reported moderately weaker demand from large and middle market firms, and 50% reported the same for small firms. Forty percent reported that demand for loans from large and middle market firms were about the same in the last three months, and 44.4% reported the same steady activity for small firms. (Only 54 officials responded to the question of demand from small firms.)

Although demand for residential mortgage loans remained about the same, officials reported noteworthy changes. In the last three months, 40% responded that demand was about the same, but 36% said it was moderately stronger. Fourteen percent said it was substantially stronger, the highest level of demand on the survey.

The Mortgage Brokers Association of America reported 1030.5 on its loan application index for the week ending Nov. 1. Three months ago, it reported an index of 1066.9 for the week ending Aug. 2, a slight 3.4% difference from November.

Standards for approving C&I loans remained virtually unchanged in the past three months, according to the federal survey. Eighty percent of officials reported no change when considering applications for large and middle market firms, while 20% said the standards have tightened somewhat. Almost 82% said the standards have remained steady for small firms, with most of the rest answering that the criteria have tightened somewhat.

In the August federal survey, 22% of officials reported tightened standards on C&I loans to large and middle-market firms in the prior three months, as opposed to just 20% in the current survey. By contrast, 6% in August reported tightened criteria for loans to small firms, which has jumped to 20% in the current survey.

Individuals applying for residential mortgage loans have seen strong consistency from their banks in the past three months. Of the 50 officials responding, 45 of them said the standards for these loans have remained basically unchanged, with five saying the requirements have tightened somewhat.

Addressing the refinancing boom, the survey asked about the typical increase over the original outstanding balance when individuals refinanced within the last six months. Of the 46 officials who responded, 20 said they saw a typical cash out of between 10 and 15%. Twelve officials said a typical increase was between 5 and 10%, and most everyone else saw typical increases of between 15 and 25% over the original balance.

The survey also asked what borrowers were doing with that cash out money. The 43 respondents said most customers used the additional money to pay down on other debt, while the second most popular use was for home improvement. The Joint Center for Housing Studies at Harvard University found that residential remodeling expenditures increased 3.3% from third quarter 2001 to third quarter 2002, according to its latest Remodeling Activity Indicator. The National Association of the Remodeling Industry also recently announced that residential remodeling and repair expenditures are at an all-time high.

The same survey questions also were asked of officials from 20 foreign banks, whose answers were categorized separately.

Christy Robinson is the editor of MortgageDaily.com. She received a bachelor's degree in news-editorial journalism from The University of Texas at Arlington. Her work has previously been published in The Dallas Morning News.

email Christy at: [email protected]

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