Banks tighten up on 'prime' borrowers

WASHINGTON — Many U.S. banks have made it harder for creditworthy borrowers to get a mortgage, according to a Federal Reserve survey released Monday that underscored the spread of a painful credit crunch.

"About 55 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages," the Fed survey said. That was up from about 40 percent in a previous survey released in November.

Problems first cropped up in the market for risky "subprime" mortgages made to people with tarnished credit or low incomes and have been spreading to more creditworthy borrowers. Foreclosures have hit record highs.

About 60 percent of domestic banks responding to the survey indicated that they had tightened their lending standards for approving applications for revolving home equity lines of credit over the past three months, the Fed said.

The Fed's survey found that banks have tightened lending standards on a range of mortgages. They also have tightened lending standards for businesses.

For the latest survey, banks had to respond by Jan. 17. That was before the Fed — in part citing a worsening credit crunch — became more aggressive in cutting its key interest rate.

The Fed last week lowered its key rate by a bold half-percentage point. Just eight days earlier, the Fed in an emergency session slashed its key rate by a rare three-quarters-percentage point. Fed Chairman Ben Bernanke convened that meeting after stocks plunged worldwide, intensifying fears that the United States was heading toward its first recession since 2001. The two cuts together represent the Fed's most intensive rate reductions in two decades.

The survey also found that "large majorities of domestic and foreign banks expect a deterioration in loan quality in 2008," affecting both business and consumer loans, the Fed said.

The survey was based on responses from 56 domestic banks and 23 foreign banking institutions.