Kent Hoover writes in the Phoenix Business Journal that lending standards will remain tight until the second half of 2010, according to senior loan officers at large banks.

The Federal Reserve Board’s survey of bank lending practices over the past three months found that domestic banks continued to tighten standards and terms on all major types of loans to businesses and consumers. Demand weakened for all types of loans except prime residential mortgages.

A net 30 percent of domestic banks tightened standards on commercial and industrial loans to large companies, while 35 percent tightened standards on loans to small businesses. The good news is the number of those tightening credit for small companies is down significantly from January’s 70 percent.

An uncertain economic outlook and reduced tolerance for risk were the main reasons cited for tightening credit standards.

About 45 percent of domestic banks reported weaker demand for loans from large companies, and 55 percent reported weaker demand for loans from small businesses.

A U.S. Treasury Department report on lending by the 22 banks that have received the most government funds through the Capital Purchase Program predicts that weak demand for business loans will continue through the third quarter of 2009.

Outstanding loan balances at these banks fell 1 percent in June, and new loan originations increased by 13 percent. Small-business loan originations, including renewals, increased by 26 percent at these banks. Wells Fargo originated the most small-business loans, totaling $2.9 billion, followed by Bank of America ($1.7 billion) and BB&T ($1.1 billion).

Wells Fargo also leads banks in U.S. Small Business Administration-backed loans. Both of the SBA’s main guaranteed-loan programs are down significantly this year. Through Aug. 14, only 36,055 7(a) loans had been approved during this fiscal year, down 43 percent from the same period a year ago. Only 5,173 504 loans, which are used primarily for real estate, had been approved, down 35 percent.

Those numbers would be even lower if the SBA had not reduced or eliminated fees on these loans in March and raised the government guarantee on 7(a) loans to 90 percent — enhancements made possible by the economic stimulus legislation.

More lenders are beginning to participate in a new emergency bridge loan program also created by the stimulus bill. As of Aug. 14, 470 lenders had made a total of 1,375 America’s Recovery Capital loans. That’s an increase of about 120 lenders in a two-week period.

Small businesses can borrow up to $35,000 interest-free through the ARC program to make up to six months of payments on existing debt. They don’t have to start repaying the ARC loan until 12 months after the final disbursement. To qualify, small businesses must show they have been profitable in one of the past two years and can generate sufficient cash flow in the future to pay off their loans.

The SBA, however, expects a default rate of more than 60 percent for these ARC loans. The SBA guarantees 100 percent of the amount of the loans, but some lenders fear they’ll have trouble collecting that guarantee. Other complain the monthly interest rate the SBA pays lenders on these loans — prime plus 2 percentage points — is not enough to make the loans worthwhile.

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TALF extension could help commercial real estate

The Real Estate Roundtable praised the federal government’s decision to extend its Term Asset-Backed Securities Loan Facility into next year.

The Federal Reserve Board and the Treasury Department announced Aug. 17 that they would continue to make TALF loans to investors in new securities backed by commercial real estate mortgages through June 30, 2010. TALF loans for investments in securities backed by consumer and business loans, and existing commercial mortgage-backed securities, will continue to be made through March 31.

The TALF program was created to thaw the frozen market for these types of securities. It had been scheduled to expire Dec. 31.

The extension “sends a clear signal to markets that the Fed and Treasury understand the gravity of the problem in commercial real estate credit markets,” said Jeffrey DeBoer, president and CEO of the Real Estate Roundtable.

DeBoer said it is “virtually impossible for borrowers to refinance commercial real estate loans. The lack of a functioning credit market is putting downward pressure on property values and is causing an increasing number of commercial property owners to face maturity defaults on their loans.”

The extension of TALF should allow more commercial mortgages to be securitized, DeBoer said, which would enable lenders to make more new loans.

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Read more at: Phoenix Business Journal