Banks have tightened lending standards for most categories of residential real estate (RRE) loans and home equity lines of credit (HELOC) over the third quarter of 2023. The tightening came amid elevated interest rates and uncertainty in economic conditions. 

A survey taken by the Federal Reserve showed that a 20%-plus share of banks reported having tightened standards on non-qualified-mortgage (non-QM) jumbo residential loans (23.9%), QM jumbo loans (26%), non-QM non-jumbo (20.4%) and HELOCs (21.8%), respectively, according to the Federal Reserve’s October 2023 senior loan officer opinion survey on bank lending practices. 

Government residential mortgage was an exception, where standards remained basically unchanged.

Only 4.2% of banks reported to have tightened standards on government residential mortgages, the report showed.

When banks become less willing to offer credit, it can have the same effect as the central bank raising rates. Households and businesses find it more difficult and costly to borrow, which tends to limit demand for goods and services.

“Banks most frequently cited a less favorable or more uncertain economic outlook; reduced tolerance for risk; deterioration in the credit quality of loans and collateral values; and concerns about funding costs as important reasons for tightening lending standards over the third quarter,” the report said.

Responses were received from 62 domestic banks and 19 U.S. branches and agencies of foreign banks. Respondent banks received the survey on Sept. 15, 2023, and responses were due by Oct. 5, 2023. 

The survey, fielded quarterly by the central bank, asks loan officers about topics such as changes in lending terms as well as household demand for loans.

With mortgage rates having climbed past 8% before dropping back down in the 7%-range in the third quarter, demand weakened for all RRE loan categories. 

A 40%-plus share of all surveyed banks said they saw weaker demand for all types of RRE loans.

The seven categories of residential home-purchase loans that banks are asked to consider are GSE eligible (42.9%), government (52.1%), QM non-jumbo non-GSE-eligible (57.1%), QM jumbo (56%), non-QM jumbo (63%), non-QM non-jumbo (61.4%), and subprime mortgage loans (71.9%). 

While HELOCs have gained popularity as owners leveraged accumulated home equity, rising interest rates dampened the appeal. 

The survey showed that 30.4% of banks reported weaker demand for HELOCs as interest rates remain at a 22-year high in a range of 5.25% and 5.5%.