Mortgage lending to tighten despite increased demand for home loans

MORTGAGE lending by Irish banks is set to tighten further despite expectations that demand for home loans will increase.

Figures released by the European Central Bank (ECB) show balance sheet constraints and an increase in cost of funds for banks are among the main reasons for the sixth successive quarter of tightening of credit standards on loans.

The tightening of mortgage availability was reflected in higher loan margins and more restrictive loan-to-value ratios, according to the eurozone bank lending survey.

“The ongoing financial market uncertainty impacted on banks’ capital position and their willingness to lend during the first quarter of 2009,” the Central Bank said.

Many Irish-based banks expect credit standards on loans to households to tighten during the second quarter of this year. The demand for mortgages is expected to increase marginally and the demand for loans to households for consumer credit is expected to drop.

Balance sheet constraints and the increase in banks’ cost of funds also saw credit standards on loans to businesses tighten during the first quarter of this year.

It said the tightening in credit was stronger on loans to larger firms rather than to small and medium-sized businesses.

All five Irish banks surveyed said recent government moves on recapitalisation and state guarantees have improved access to wholesale funding markets.

On a Europe-wide basis lending to euro-region companies and households declined for a second month in March, extending the worst drop since records began 18 years ago.

Loans fell 0.2% from February, when they declined 0.1%, the European Central Bank (ECB).

While a separate report showed banks expect to tighten credit standards less forcefully in the second quarter, the European Commission said consumers expect prices to fall for the first time since 1990.

“The hard lending data shows that the ECB is facing a deflation problem and will have to act more aggressively,” said James Nixon, an economist and former ECB forecaster.

“Unfortunately, the Governing Council will probably latch on to the more positive bank survey and do a lot less than is necessary in the current environment.”

The ECB meets next Thursday to make a decision on any further rate cuts. It has lowered its benchmark interest rate by 3 percentage points since early October to a record-low 1.25%.