In a survey by the Federal Reserve, it was found that over half of banks responding said they're tightening the lending standards for subprime mortgages, lending further proof the problem is larger than may have been first admitted or expected.
The survey included 16 of the largest banks in the U.S., and 9 of them said they had tightened loan standards. It makes me wonder if the other 7 are stupid.
Be definition, subprime mortgages are loans offered to people who wouldn't normally qualify for a loan.
The specifics of the loans themselves are adjustable-rate loans, interest-only and others called "Alt-A" loans which are offered with limited proof of income, among other things.
"Lending standards are being tightened as aggressively as in the credit crunch of 1990-91," said Mark Zandi, chief economist at Moody's Economy.com.
According to the Mortgage Bankers Association, the number of subprime loans that were past due by 30 days or more rose to 15.75 percent during the first three months of 2007. That is an all time high for these mortgages.
The problems the FED faces are these:
Tightening the money supply will probably burst the housing and the market bubble.
Inflating the money supply over the short term will help the stock market but could devastate the housing bubble.
Long term inflating of the money supply will decrease the purchasing power of the dollar, something that's been going on for decades.
If I had to choose which it would be, I would think the pressure would be on the third choice, as it's the least politically damaging for whoever would be in office.
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