Fed Senior Loan Officer Survey Supports Doing More for Homeowners

Most people in Washington are carefully tracking political polls today, trying to predict the fates of their presidential and congressional candidates. However, there are others both inside and outside of Washington studying another survey released this afternoon—the Federal Reserve’s quarterly Senior Loan Officer Survey.

The October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices confirms what many have suspected—credit markets are still struggling. Conducted October 2-16, the survey gathered responses from 55 domestic banks and 21 U.S. branches of foreign banks. The survey focuses on two areas:

  1. changes in the amounts of commercial and industrial (C&I) loans and
  2. changes in credit limits on existing credit card accounts for prime and non-prime borrowers.

Roughly 85 percent of domestic banks said they had tightened their C&I lending standards for large and middle-market firms in the past three months, and 75 percent said they had tightened the standards for small firms. The survey also found that “demand for loans from both businesses and households at domestic institutions continued to weaken, on net, over the past three months.” Additionally, banks reported “reducing credit limits on existing credit card accounts both to prime and nonprime borrowers.” Most respondents said the tightening was due to the uncertain economic outlook.

While this news is not unexpected, it is somewhat of a setback to the Treasury and the Fed, which have both taken extraordinary measures to inject liquidity into the credit markets to spur more lending. This October survey offers more statistical support for the recent Congressional arguments that Treasury should be doing more to help homeowners and less to help banks. House Financial Services Chairman Barney Frank issued a statement on Friday saying he was "deeply disappointed" that financial institutions were not using government funds to increase lending. His committee will hold oversight hearings on November 12th and 18th. The day before Frank’s statement, a majority of the Democrats on the Senate Banking Committee, led by Chairman Chris Dodd (D-CT), sent a letter to the President asking him to direct the Treasury Department and the Federal Deposit Insurance Corporation to establish a program to help homeowners avoid foreclosure. Given the decline in third quarter GDP growth to 0.3 percent and today’s survey news, it is very possible the Administration may have a foreclosure mitigation plan in place before the House oversight hearing next week.

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