Just like investors don't know how many subprime loans are in the mortgage-backed securities they buy, borrowers don't know which banks are tightening lending standards. According to the Federal Reserve, most banks are tighter about handing out mortgage money than they used to be. And that doesn't improve the guidance for the real estate industry in the short term.

As columnist and economy observer Peter Miller points out -- we're having a credit crisis while "looking at rates last seen in the 1960s." Imagine what a world of hurt the real estate industry would be, he points out, if interest rates were at 7, 8 or 9 percent, all of which are much closer to historical norms.

It's yet another reason why borrowers should apply for mortgage loans and homeowners should refinance adjusting or higher rate loans -- the situation isn't likely to get better for some time to come.

The Fed conducted a survey in early October of banks that supply approximately 75 percent of all residential mortgage loans and found that 41 percent of banks had tightened their loan requirements "considerably" or "somewhat" for prime loans (offered to borrowers with very good credit scores and histories). Non-traditional loans such as no-doc or interest-only loans, also known as Alt-A mortgages, were even tighter -- 60 percent of the banks that offered those kinds of loans tightened their lending criteria, up from 40 percent of banks surveyed in July.

What's significant is that the standards are tighter for both prime and non-traditional loans than they were in July in the heat of the "mortgage meltdown" when it was discovered that investors were shunning mortgage-backed securities because of the rising defaults in the subprime category.

Mortgage-backed securities should become more attractive to investors because 40 of the 49 banks participating in the survey said they are no longer offering subprime mortgages. Five of the nine banks remaining said they had tightened their subprime lending criteria.

This news comes in the wake of substantial losses reported by banks due to mortgage loan defaults such as Countrywide and Citigroup, and by investment firms that purchased and sold mortgage-backed securities such as Merrill Lynch.

Published: November 14, 2007

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