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Small Banks Tighten Underwriting

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A recent restricting of underwriting standards on home loans has been concentrated at smaller banking institutions. Demand for residential loans and home-equity lines was down.

Those were some of the findings in the October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices. Responses for the survey were received from 57 domestic banks and 22 U.S. branches of foreign banks.

The report indicated that a small share of banks tightened standards on both prime and nontraditional mortgage loans. In the prior report, there was a slight net easing reported for prime loans.

Small banks were responsible for the tightening on prime mortgages, with guidelines at big banks mostly unchanged. But tightening on nontraditional loans, which were only originated by just half of the respondents, happened at small and big banks alike.

“Modest net fractions of banks reported weakening demand for both prime and nontraditional mortgage loans to purchase homes,” the Fed stated.

As demand weakened, smaller banks also tightened guidelines on home-equity lines of credit. Some of the respondents said they reduced the size of credit lines.

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