Bank lending expected to remain tight in 2010

— -- The Federal Reserve said Monday that 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.

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

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

Around 35% of U.S. banks in the July survey reported tightening their lending standards for credit cards, down from nearly 60% in the previous survey and around 65% 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%, at 5.29%, 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, subpar return to growth."