The Federal Reserve’s latest release of the Senior Loan Officer Opinion Survey shows banks’ lending practices and households and businesses’ demand for various classes of loans as of the second quarter of 2020. As evidenced in the survey, in the wake of the COVID-19-wrought pandemic, widespread economic hardship caused many banks to tighten their standards across all credit classes of households and businesses. With these tightening standards also came the imposition of interest rate floors on financial products in Commercial & Industrialized lending. At the same time, businesses reported weaker demand for loans in the second quarter, not only when compared to the previous quarter but also when compared to second quarter of the prior year.
As shown above, as of the second quarter of this year, on net, 64% of banks held tighter standards for financing multifamily developments than banks which did not, and 81% of banks held tighter standards for financing construction and land development than those which did not. At the same time, an overwhelming positive net share of real estate businesses expressed less demand for those activities; on net, 58% of banks reported less demand for multifamily loans and nearly 60% of banks reported less demand for loans for construction and land development. These results are consistent with the general state of the U.S. economy reeling from the initial economic effects of the pandemic.
Unlike the demand for commercial real estate, the demand for residential real estate, i.e., single-family units, has shown strong growth. As interest rates reached record lows, pent-up demand for housing that had been latent in the first months of the pandemic in the United States, combined with severe supply constraints, created a perfect storm. The data show net shares of banks reporting increased demand over the last three months across various mortgage classes. Interestingly, the data also show slightly higher shares of banks reporting stronger demand for Qualifying Mortgage (QM) loans than non-QM loans. Qualifying Mortgages ensure that the borrower meets certain requirements.
This is not the time for banks to “Tighten” the rope on construction for home loans. People are hurting for affordable housing. We need more affordable loans,with interest rates lower,this helps both the seller and the buyer. Banks are acting out of fear…not need for the economy.