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Outlook Improves for Nontraditional Loans

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While lending officers at financial institutions reported little change in how well they expect prime mortgages and home-equity lines to perform this year, expectations improved significantly for nontraditional loan quality. On the commercial side, mortgage terms eased for the first time in several years.

Lending standards on purchase-money residential loans to prime borrowers were little changed over the past three months, according to the January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices released Monday by the Federal Reserve Board. The report was based on responses from 56 domestic banks and 23 U.S. branches and agencies of foreign banks.

The survey indicated that home-loan demand was also little changed.

Standards on home-equity lines of credit additionally saw little change, though demand was weaker.

Around a third of respondents anticipated an improvement in the asset quality of prime residential loans and HELOCs, about the same share as a year ago.

But the story was better for nontraditional home loans.

“About 55 percent of banks, on net, anticipate that delinquency and charge-off rates on such nontraditional loans will decline this year compared with about 20 percent of the respondents to last year’s survey,” the report said.

Standards for commercial real estate loans were little changed. “Moderate fractions” of the respondents reported that CRE loan demand had strengthened.

Some of the bankers indicated that they had eased maximum CRE loan sizes over the past year, while many indicated that loan-rate spreads were reduced. A few large banks said they had extended maximum loan maturities.

It was the first in five years that easing occurred with some of the CRE loan terms covered in the survey.

Around 60 percent of domestic banks indicated that they expect improvement in the quality of CRE loans this year.

“Overall, in the January survey, domestic banks reported that their lending standards had changed little and that they had experienced somewhat stronger loan demand, on net, over the past three months,” the report said.

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