Fed says prime mortgage demand grew in first quarter

Demand for prime mortgages rose in the first quarter for the first time since early 2007, even as banks tightened standards for home loans, the Federal Reserve said in a survey of loan officers released Monday.

The Fed's new quarterly survey found that about half of U.S. banks tightened lending standards on prime mortgages, up from about 45% in the survey released in early February.

Meanwhile, 65% of banks said they tightened standards on nontraditional mortgages, such as adjustable-rate loans with multiple payment options. That was up from 50% in the last survey.

Demand for nearly all types of consumer and business loans continued to weaken the past three months, with the exception of prime mortgages, which registered the first increase since the Fed began to track those loans separately in April 2007.

That uptick in demand comes as mortgage rates dropped, helped by a concerted Fed effort to drive down rates to help revive the crippled housing industry.

Rates on 30-year mortgages slid to an averge 4.78% last week, tying a record low, according to mortgage giant Freddie Mac.

In other lending, nearly 60% of banks said they tightened standards on credit card loans the past three months, same proportion as in the previous Fed survey.

There were some spots of easing in lending standards. About 40% of banks said they tightened standards on commercial and industrial loans the past three months. That was down from 65% in the last survey.

Looking ahead, however, "the vast majority" of banks said they expected deterioration in credit quality for all types of household and business loans.

More than 70% said the quality of their bank's loan portfolio was likely to deteriorate this year with nontraditional mortgages and credit cards figuring prominently in that scenario. That response was to a special question in Monday's survey that wasn't asked in the previous one.

The Fed survey was based on responses of 53 domestic banks and 23 U.S. offices of foreign banks.

Getting banks to boost lending is critical to lifting the country out of recession.

The Fed has slashed a key bank lending rate to a record low near zero and is expected to hold it there well into next year to entice banks to lend and businesses and consumers to spend.

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.