Nearly one in four U.S. banks reported they eased mortgage-lending standards for borrowers with strong credit during the second quarter. It's the largest movement by lenders since the housing bust hit nearly eight years ago.
Despite the uptick in lending to prime borrowers, most banks said standards remain tighter than normal and there are few signs that standards are easing for borrowers without good credit.
Record lending by U.S. banks has helped the economy recover from a contraction earlier this year brought on by a harsh winter. Employers added more than 200,000 jobs for a sixth straight month in July, according to numbers from the U.S. Labor Department. That hasn't occurred since 1997.
Key policy makers repeatedly have raised concerns in the past year that tight credit standards could hamper the housing recovery.
While standards should have ratcheted up after the housing bubble, "it is difficult for any homeowner who doesnt have pristine credit these days to get a mortgage," Fed Chairwoman Janet Yellen said at a press conference in June.
The Fed surveyed 75 U.S banks and 23 U.S. units of foreign banks from July 1 to July 15. The Fed found most consumer lending didnt change. While many banks reported having eased standards for prime residential real estate loans, respondents generally indicated little change in standards and terms for other types of loans.
Some economists believe a large headwind facing the housing market is too many consumers can't borrow because they have high levels of debt, damaged credit from the recession or insufficient incomes to become home buyers. Looser credit standards can only do so much to easily address those challenges.
Many mortgage lenders have said standards remain far more stringent than they would at this point in a normal recovery for a few reasons. Among those reasons: increased costs associated with handling defaulted mortgages; new regulations that have taken effect this year; and continued uncertainty over so-called mortgage put-backs in which loan investors and insurers are forcing banks to take back loans that have underwriting defects.
The Fed survey offered one sign that lending standards could be slow to thaw even if mortgage rates head higher and lenders search for more business. New rules took effect in January that allow for tougher penalties if lenders fail to verify a borrower's ability to repay a mortgage. An estimated one-third of lenders polled in the survey said those rules had led to a lower approval rate for prime borrowers.