Are tighter lending practices a good or bad thing?

Isn’t the nation’s banking system a chicken-and-egg situation?

The housing crisis which started the economic meltdown was partially due to banks making loans to people who shouldn’t have had them to buy things they couldn’t afford. When the house of cards collapsed, banks stopped making loans, which led to the U.S. government to throw billions of dollars at them to try to get them to start issuing credit again.

How’s that going? Not so well, the quarterly report from the Federal Reserve says today. Its quarterly survey says about 50 percent of U.S. banks tightened their lending standards on prime mortgages, up from about 45 percent in the survey issued in early February. Sixty-five percent of the banks tightened lending standards on “non-traditional” mortgages, such as ARMs.

This comes at a time when demand for mortgages is starting to increase, helped along by lower mortgage rates.

Find the survey here.

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