updated 8/17/2009 5:59:20 PM ET 2009-08-17T21:59:20

The Federal Reserve said Monday most banks expect their lending to remain tight through the second half of next year, with the exception of mortgage standards, which already are loosening a bit.

Major Market Indices

The Fed’s latest survey of loan officers found that about 20 percent of U.S. banks tightened their lending standards on prime home mortgages in the April-June quarter, down from around 50 percent in the previous quarter and a peak of about 75 percent a year ago.

Meanwhile, 45 percent of banks say they tightened standards on nontraditional mortgages, such as adjustable-rate loans with multiple payment options, down from 65 percent in the April survey and around 85 percent a year ago.

Around 35 percent of U.S. banks in the July survey reported tightening their lending standards for credit cards, down from nearly 60 percent in the previous survey and around 65 percent a year ago.

“The report tells us that credit is not becoming more readily available, but also that the credit freeze is at least moving in the direction of a thaw,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities.

Getting banks hurt by the financial crisis to boost lending is critical to a sustained economic recovery.

Demand for prime mortgages has begun to revive, posting its first increase in the January-March quarter since the Fed began to track those loans separately in April 2007.

The uptick in mortgage demand comes as rates rose last week. Rates on 30-year home loans remained above 5 percent, at 5.29 percent, after reaching a record low earlier this year.

The Fed survey was based on the responses of 55 domestic banks and 23 U.S. offices of foreign banks.

Most of the banks polled expect their standards for all types of loans to remain tighter than average levels over the past decade through at least the second half of 2010. For businesses and families with tarnished credit, that is expected to continue into “the foreseeable future” for many banks, the Fed reported.

Except for prime mortgages, loan demand remains weak, LaVorgna noted. “We will become more bullish on the pace of the recovery if loan demand firms or lending standards ease,” he said. “Until then, expect a muted, sub-par return to growth.”

The Treasury Department, meanwhile, said Monday that the value of loans held by the 22 biggest banks receiving federal bailout support fell in June for a fifth straight month. That survey did find that the amount in new loans made in June rose 12.7 percent following a 1.4 percent increase in May.

The monthly survey monitors the impact the bailout program is having on the goal of boosting loans to consumers and businesses. The banks that have received support include Citigroup Inc. and Bank of America Corp.

In other lending pinpointed in the Fed survey, around 45 percent of banks said they tightened standards on commercial real estate loans over the last three months, down from 65 percent in the April survey and around 80 percent a year ago.

While banks’ losses on home mortgages appear to be leveling off, delinquencies on commercial real estate loans remain a hot spot of potential trouble, experts say. Many regional banks hold large numbers of them.

A dramatic example was Colonial BancGroup Inc., a big lender in real estate development that failed and was shut down by regulators on Friday — the biggest U.S. bank to collapse this year with about $25 billion in assets. Montgomery, Ala.-based Colonial was a major lender to developers in Florida and Nevada and was hit hard by the collapse of the real estate market in those states. Its failure is expected to cost the federal insurance fund around $2.8 billion.

The Fed on Monday extended through March 31 the duration of a program intended to spur lending to consumers and small businesses at lower rates, though it said it had no plans to expand the types of loans being made. The Term Asset-Backed Securities Loan Facility figures prominently in the government’s efforts to ease credit, stabilize the financial system and help end the recession. Under the TALF, investors use the funds to buy securities backed by auto and student loans, credit cards, business equipment and loans guaranteed by the Small Business Administration.

Commercial mortgage-backed securities, which were added to TALF in mid-June, were extended through June 30 because issuing new securities in that area “can take a significant amount of time to arrange,” according to a joint news release from the Fed and the Treasury Department.

Last week, the Fed held interest rates steady at record lows and again pledged to keep them there for “an extended period” to entice businesses and consumers to spend more and nurture an anticipated recovery.

The Obama administration is counting on tax cuts and increased government spending to revive the economy. And it has put forward plans to rescue banks and curb home foreclosures, also key ingredients to turning the economy around.

Lax lending standards during the housing boom allowed some people to buy homes that they couldn’t afford. When the boom ended, dragging home values down, foreclosures skyrocketed and banks wracked up huge losses on soured mortgage investments.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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