The Federal Reserve reported that banks are starting to ease mortgage lending standards but only for the worthiest borrowers, which is a likely stumbling block for the housing recovery, The Wall Street Journal reported May 6.
The Fed’s latest survey of senior loan officers released May 6 reported that almost 10 percent of banks said they had eased lending standards for prime or low-risk borrowers in the first quarter. Only 5 percent of banks reported easing standards the previous quarter.
However, banks still only are lending to borrowers with strong credit histories. The Fed noted that most banks said they were not more willing to lend to borrowers with middle-of-the-range credit scores, and lending standards for subprime mortgages remained very tight, the Journal reported.
The survey indicated that many consumers with less than stellar credit cannot take advantage of low interest rates, which is a drag on the housing recovery.
While Fed Chairman Ben Bernanke noted that loose lending standards helped fuel the economic crisis, he said that he is concerned banks may be erring too much on the side of caution and that the strategy is limiting the effects of Fed policies to keep interest rates low, the Journal reported.
The Fed’s survey reported that a modest number of banks were more likely to approve applications from borrowers with a FICO score of at least 720 and a 20 percent down payment. They reportedly were less likely to approve loan applications from borrowers with a FICO score of 620.
Some economists told the Journal that they hoped to see banks loosening standards to open up financing for higher-risk borrowers once the demand for low-interest-rate loans starts to slow.