Banks Pick Up Where Fed Left Off, Restricting Access to Credit

Banks are picking up the baton from the Federal Reserve, restricting access to credit months after Chairman Ben S. Bernanke stopped raising interest rates.

Fed officials may discuss the tightening in mortgage lending and its impact on the economy, already slowed by a housing recession, at their two-day meeting that starts today. Countrywide Financial Corp., the biggest U.S. mortgage provider, last week stopped taking applications for no-money-down loans from risky borrowers without proof of income.

The new constraints on lending may be real-world evidence of the ``lags'' in monetary policy that policy makers flagged when they ended two years of rate increases in August. The central bank will keep its benchmark rate at 5.25 percent, economists predict, counting on slower growth and past rate boosts to bring inflation within their tolerance zone.

``The market is definitely tightening standards, and to the degree the market controls the flow of capital, the Fed does not have to,'' said Carl Tannenbaum, chief economist at ABN Amro Holding NV's LaSalle Bank in Chicago. Officials have kept their tightening bias at the past five meetings, meaning any policy shift is likely to be a rate increase.

The Fed's quarterly survey of senior loan officers, released last month, found a net 16 percent of U.S. banks recently tightened mortgage standards, the most since 1991. The report was based on responses from companies accounting for almost two- thirds of the $8.4 trillion industry.

Beige Book

The central bank's March Beige Book, a survey of regional economies compiled from businesses and Fed contacts around the country, found ``some weakness'' in consumer lending in the Dallas and Cleveland districts. Credit standards tightened on all loans in New York, the report said.

A crackdown on lending may have begun as early as six or nine months ago, said Douglas Duncan, chief economist at the Mortgage Bankers Association in Washington. ``They're probably ahead of the Fed in some ways,'' he added.

Deteriorating subprime loans fueled the rush to lift standards. Subprime borrowers, who have little or poor credit, fell behind on mortgages at the highest rate in four years last quarter and foreclosures climbed, the Mortgage Bankers Association reported last week.

General Electric Co.'s WMC Mortgage, the fifth-biggest U.S. subprime lender, said March 9 that it would refuse mortgages to borrowers with credit scores below 600. The Burbank, California- based bank also fired 20 percent of its staff.

Countrywide, Wells Fargo

Three days later, Calabasas, California-based Countrywide limited subprime borrowers that don't document their income to loans worth 85 percent of their homes. Wells Fargo & Co., the largest U.S. subprime lender, said in a March 7 statement to Bloomberg News that it changed standards effective Feb. 16 for some risky customers.

The Fed may alter its language to reflect the tumult in subprime mortgages. On Jan. 31, the Federal Open Market Committee said ``some tentative signs of stabilization have appeared in the housing market.''

``That might be a little bit of a stretch'' this time, said Diane Swonk, chief economist at Mesirow Financial in Chicago. She added that the wording may acknowledge that the housing market's performance has been mixed.

The Fed will release its statement at about 2:15 p.m. in Washington tomorrow.

Adjustable Rates

The central bank's 17 rate increases helped trigger the downturn in lending. The benchmark rate, which covers overnight loans between banks, has more influence on short-term loans, including the adjustable-rate mortgages that some borrowers are struggling to pay. A typical such loan has a fixed rate for one to three years, then adjusts annually.

The arrangements allowed for cheaper initial monthly payments when short-term interest rates, such as the Fed's rate target, were lower than long-term rates, such as yields on 10- year Treasuries, a benchmark for 30-year mortgages.

At the same time, there are few, if any, indications that borrowers with strong credit are finding it tougher to get a loan or seeing higher rates.

The Fed's loan-officers survey showed that banks on balance left lending standards unchanged for credit cards and other consumer loans.

``The environment has improved for borrowers that have good credit,'' said Greg McBride, senior financial analyst at North Palm Beach, Florida-based BankRate.com, which tracks consumer interest rates. ``It's the best it's been in months. And that's the majority of borrowers.''

Fed Forecast

As the subprime crisis intensified, Fed officials gave no indication of changing their Feb. 14 forecast for economic growth this year of 2.5 percent to 3 percent.

Bernanke, 53, said March 2 that the central bank sees no ``spillover'' from the delinquencies in subprime mortgages. ``We're obviously going to watch it very carefully,'' he said at California's Stanford University.

Policy makers may be surprised at the rout in subprime mortgages because rate increases typically don't have such a deep impact on just one area of the economy, said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.

``Generally that transmission is not viewed as being so narrow in one area and so absent in other areas of the economy,'' Kasman said.

source:www.bloomberg.com