The Senior Loan Officer Survey
The Senior Loan Officer Survey is put out by the Federal Reserve every quarter. The Fed surveys up to 80 large domestic banks and 24 foreign banks. It conducts the survey quarterly, but it’s on a January, April, July, and October schedule in order to be available for the upcoming FOMC (Federal Open Market Committee) meetings. The survey questions cover changes in lending standards and the state of loan demand, both from consumers and businesses. Like most Fed surveys, often there are a couple of questions that address themes in the market.
Highlights of the survey
Credit eased during the quarter, but it was primarily associated with commercial real estate and commercial or industrial lending. Consumer lending and mortgage lending standards eased, but only barely. The vast majority of banks reported no changes in standards. Here were the results.
- Prime residential loans: Prime residential loans include loans made to borrowers that typically had strong credit, had well-documented credit histories, and were plain 30-year fixed-rate or ARM (adjustable-rate mortgage) loans. Of the 69 banks surveyed, 58 (or 87%) reported no change in standards, while two (3%) tightened standards and seven (10%) reported loosening standards. Two said they didn’t offer prime residential loans.
- Nontraditional residential loans: Nontraditional residential mortgage loans include limited documentation, alt-A, non-owner occupied, and pick-a-pay loans. Of the 69 banks surveyed, 37 (or 54%) said they don’t offer nontraditional residential loans. Of the remaining banks, 28 (or 88% of the remainder) reported no changes, while one tightened standards and three eased standards.
- Subprime residential loans: These are loans to borrowers that had weakened credit histories, payment delinquencies, high debt-to-income ratios, or incomplete credit histories. Of the 69 banks surveyed, 65 said they don’t offer subprime loans. Of the remaining four banks, three made no changes in credit standards, while one tightened them considerably.
Implications for homebuilders
During second quarter earnings, almost all CEOs reported tight credit as a constraint to their growth. Certainly homebuilders that focus on the lower price points like PulteGroup (PHM) and Beazer (BZH) reported drops in orders due to higher home prices and also credit difficulties among first-time homebuyers struggling with student loan debt. We have yet to hear from Toll Brothers (TOL), which concentrates on the luxury end of the market. Other homebuilders like Lennar (LEN) and KB Home (KBH) reported strong numbers, but they’re in attractive geographic and demographic segments.
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