WASHINGTON — Banks appear to be effectively using a government program to help struggling borrowers refinance their underwater mortgages in order to make monthly payments more manageable.

In the Fed's Senior Loan Officer Opinion Survey released Monday, banks were asked what portion of refinance applications they had received from borrowers in the last three months was tied to the government's recently adjusted Home Affordable Refinance Program.

About one-third of respondents that participated in Harp said such refinance applications accounted for 30% or more of their applications. Among the 30 banks using the program, two large banks said 50% to 70% of their refinance applications were as a result of the program.

In October the administration revised its plan to help underwater borrowers refinance by eliminating key obstacles that were impeding participation. Since then participation appears to have improved.

According to the survey, eight banks said that 30% to 50% of refinance applications they received were related to the government program, while nine others said it accounted for 10% to 30% of its applications. Eleven banks, meanwhile, said that less than 10% of their refinance business was due to Harp.

In contrast, 32 banks said they had "very little participation" in Harp.

While some banks' refinance business was being boosted by the program, institutions were largely optimistic that the share of applications they received would be approved and successfully completed.

Thirteen banks — or 43.3% — said they expected to approve between 60% and 80% of those applications. Nine others surveyed put the odds of approval above 20%, while seven expected more than 80% of such applications to be approved.

The Fed asked banks what factors affected their willingness to provide such loans, including a "very high" loan-to-value ratio, a higher FICO score, or limited income documentation of income.

"A significant fraction of respondents reported having been unwilling to offer Harp refinance loans to some customers with high loan-to-value ratios, limited or nonstandard documentation of income or assets, or low FICO scores," the Fed said in its survey.

Of the 49 institutions that responded to that question, 24 said a borrower with a very high LTV ratio would be at least a "somewhat important" factor in deciding whether or not to offer a refinanced loan. The remainder said it would not be a factor at all.

Borrowers needed to have a higher FICO score at 21 of the banks surveyed, while the majority of firms said it wasn't important.

Borrower documentation of their income or assets was by the far the most important factor according to bankers. Roughly 37% of the firms surveyed said it was "very important," if not the "most important" criterion in evaluating a borrower.

Six bankers said the most important factor in turning a borrower away was because they had reached their processing capacity.

Roughly 77% of bankers cited "other" as being the most important factor for being unwilling to offer Harp refinance loans. The Fed said that "other" meant they didn't participate in the program at all.

The survey also showed that lending standards for most categories of loans remained at least somewhat tighter, on balance, than the middle of their respective ranges since 2005. Banks were asked to consider the range over which standards have varied between 2005 and the present for each loan category.

As they had done in the last three surveys in January, October and April, the Fed also asked banks about their lending to firms with exposures to Europe.

"A large fraction of both domestic and foreign banks that extend credit to European banks had tightened standards on such loans over the past three months — a fraction that was significantly higher than that in the April survey," the survey report said.

More than half of the 22 banks surveyed — roughly 60% — said they tightened their credit standards at least somewhat with one firm saying it did so "considerably."

Forty firms selected the response, "My bank does not make loans or extend credit lines to banks headquartered in Europe or their affiliates or subsidiaries."

According to the survey, loan demand from European banks changed little. Roughly 86% said demand had stayed about the same with only two firms reporting that lending was "moderately stronger."

About one-half of U.S. banks that compete with European banks reported that business had increased due to decreased competition from such banks. Roughly 44% said they don't compete with European banks for business.

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