Fed: More banks tighten lending

The Federal Reserve said yesterday that more banks tightened credit standards for consumers and business borrowers since April as defaults and delinquencies on home loans climbed.

"The net fractions of banks that had tightened credit standards on consumer loans increased notably relative to the April survey," the Fed said in its quarterly Senior Loan Officer Survey.

The Fed, concerned that $494 billion in losses among financial institutions was damping credit, cut the benchmark interest rate at a record pace between September and April. The central bank also began accepting mortgage bonds as collateral and opened up lending to securities firms. The survey, performed last month, covers 52 domestic banks and 21 foreign institutions.

"When the Fed started to cut rates, mortgage rates and other rates were actually lower than they are today," former San Francisco Fed Bank President Robert Parry said before the report. "To say that things are easier in many areas of credit would be mistaken."

The Fed has reduced the main lending rate 3.25 percentage points over the last 11 months to 2 percent. Still, rates on a 30-year mortgage stood Thursday at 6.52 percent, nearly unchanged from 6.59 percent a year earlier, according to data from Freddie Mac.

Banks may be reluctant to lend against housing collateral that is falling in value. Home prices in 20 U.S. metropolitan areas dropped 15.8 percent in May, the biggest decline since record-keeping began in 2001, according to the S&P Case-Shiller Home-Price Index.

The economy is also faltering. The unemployment rate has moved up 1 percentage point during the last 12 months to 5.7 percent, while delinquencies on home loans to borrowers with weak or limited credit histories rose to 18.8 percent in the first quarter from 13.8 percent a year earlier.

About 75 percent of U.S. banks surveyed indicated they had tightened standards on prime mortgage loans, up from 60 percent in the previous survey, the Fed said.