In all the chaos over the past few days, we missed the release of the Fed’s latest Senior Loan Officer Survey which came out Monday. The results were striking: as one would expect from an economy in recession (and in some cases, depression), in nearly all categories, banks are reporting both tighter lending standards and sliding demand for new loans…
… and nowhere more so than in mortgages, both qualifying and otherwise, where demand has collapsed to “depression” levels as a result of the fastest every surge in interest rates.
While C&I loans are still doing ok, and demand for credit card debt is still near record highs – to be expected at a time when revolving credit debt is soaring at the fastest pace in history, record APRs be damned – it’s only a matter of time before these two core credit categories follow mortgage loan demand into purgatory at which point the US economy will be a complete disaster.
Here are some more details courtesy of Goldman:
- Lending standards for commercial and industrial (C&I) loans tightened in 2022 Q3. 39% of banks on net tightened lending standards for large and medium-market firms (vs. 24% on net in the previous quarter), while the number of banks tightening lending standards for small firms increased to 32% (vs. 22% on net in the previous quarter). 30% of banks on net widened spreads of loan rates over the cost of funds for large firms (vs. 12% on net in the previous quarter), while 25% on net widened spreads for small firms (vs. 13% on net in the previous quarter).
- For banks that tightened credit standards or terms for C&I loans or credit lines, all cited a less favorable or more uncertain economic outlook as playing a role; 61% cited reduced tolerance for risk; 59% cited a worsening of industry-specific problems; 39% cited decreased liquidity in the secondary market for these loans; 26% cited less aggressive competition from other lenders; 20% cited a deterioration in their bank’s current or expected capital position; and 20% cited a deterioration in their current or expected liquidity position as playing a role.
- Demand for C&I loans from large- and medium-sized firms weakened in Q3. 9% of banks on net reported weaker demand for C&I loans for large and medium-market firms, compared to 24% on net reporting stronger demand in the previous survey. 22% of banks reported weaker demand for C&I loans from small firms, compared to 18% reporting stronger demand the previous quarter.
- Standards for commercial real estate (CRE) loans tightened in 2022Q3. 58% (+10pp) of banks on net reported tightening credit standards for construction and land development loans, and 40% (+10pp) on net reported tightening lending standards for loans secured by multifamily residential properties. The number of banks that reported tightening standards for loans secured by non-farm non-residential properties increased to 53% (+11pp). Demand for loans secured by multifamily residential properties, loans secured by nonfarm nonresidential properties, and construction and land development loans all decreased.
- Credit standards on mortgage loans tightened somewhat. Standards eased slightly or were basically unchanged for non-jumbo, non-GSE eligible (-3.4pp to -3.4%) and GSE-eligible mortgages (flat at +1.7%). Meanwhile, standards tightened for Qualified Mortgage jumbo (-0.1pp to +5.2%); non-Qualified Mortgage jumbo (+3.8pp to +7.4%); non-Qualified Mortgage non-jumbo (-1.8pp to +3.8%); and subprime residential mortgages (-1.4pp to +11.1%).
- Banks’ willingness to make consumer installment loans decreased in Q3 (-7% on net vs. +5% on net previously). The portion of banks tightening credit standards for approving credit card applications increased (+19pp to +19%), and 2% of banks on net tightened standards for auto loans (flat). The portion of banks reporting stronger demand for credit card loans decreased but remained positive (-7pp to +11% on net), while demand for auto loans also declined (-12pp to -28% on net).
But loan supply and demand aside, the punchline from the survey is that “most banks assigned probabilities between 40 and 80 percent to the likelihood of a recession in the next 12 months, with no bank reporting a probability less than 20 percent. Although banks in general assigned relatively high probabilities to a recession occurring in the next 12 months, most banks reported expecting the recession to be mild to moderate, should one occur. In addition, most foreign banks assigned a probability between 40 and 80 percent that a recession would occur in the next 12 months.”