SLOOS: The Development World Is Under Our Boot

As I mentioned earlier (3 months ago) I was a little concerned with the results of the SLOOS (Senior Loan Officer Opinion Survey). Concern has turned to pale-faced horror.

About 55 percent of domestic banks—up from about 30 percent in the January survey—reported tightening lending standards on C&I loans to large and middle-market firms over the past three months. Significant majorities of respondents reported tightening price terms on C&I loans to these firms, and in particular, on net, about 70 percent of banks—up from about 45 percent in the January survey—indicated that they had increased spreads of loan rates over their cost of funds.
In addition, smaller but significant net fractions of domestic banks reported tightening non-price-related terms on C&I loans to these firms over the past three months.
Regarding C&I loans to small firms, about 50 percent of domestic respondents reported tightening their lending standards on such loans over the survey period, compared with about 30 percent who reported doing so in the January survey. On net, about 65 percent of banks—up from about 40 percent in the January survey—also noted that they had increased spreads of C&I loan rates over their cost of funds for these firms.

Translation: No Money, No Honey.



Developers need credit to build things, it makes sense to take out loans and leverage yourself with borrowed funds rather than finance the whole project yourself. Few people buy homes with a dump-truck full of money, they usually take out a mortgage and will pay it off in little bits until they move or die.



Developers are the same way, and development is severely impacted by changes in money and debt markets. Cutting off the supply of loanable funds is akin to shutting off the sun; we can expect that as money continues to tighten construction workers will continue to fill the bread lines.

SLOOS II Consumer Loans

Yesterday I looked at the most recent Senior Loan Officer Opinion Survey (SLOOS) in the context of commercial real estate loans. There is also an important consumer loans section to this report.

As many of you know, consumer spending accounts for almost 70% of GDP. So if consumer spending decreases then chances are good that we will enter a recession. Recent interest rate cuts by the Federal Reserve (monetary policy) has been aimed at keeping consumer spending from stalling (among other things). If that wasn't enough, the "actual" government is stepping in to provide an "economic stimulus" package (fiscal policy) in order to keep things moving forward.

When the market fails it is the duty of the government to step in, right? Well, back to the SLOOS survey, 10% of respondents reported that they had tightened their lending standards on credit card loans. While this may seem like a small number, but when it happens to you it might as well be 100%.

35% of domestic institutions indicated that they experienced weaker demand for consumer loans of all types. This may have something to do with weaker demand for home equity lines of credit.

SLOOS, Why do you have to be so mean?

It took me awhile to realize this, but money really does make the world go round. Money has a very prominent role in what we economists assume people are motivated by and respond to.
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For example, most Marchallian charts (those with supply AND demand) have price (money) right there on the vertical axis with units on the horizontal axis.
.Indeed, capitalism would be very difficult without money (capital) which is why so much talk recently has been focused on the so called "credit crunch"
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I personally wasn't incredibly worried until I happened across the latest issue of SLOOS (Senior Loan Officer Opinion Survey).
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Basically, the Fed sends a survey to the heads of the largest lending institutions in the country and asks them what their risk outlook is like for the upcoming year and how much money these institutions plan on lending to the economy at large.
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80% of respondents (the people who loan out money) say they plan on tightening their standards for commercial real estate loans in a situation that eerily parallels the last notable real estate credit crunch, the 1980's S&L crisis.
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While there is a potentially large difference between what senior loan officer's say and what senior loan officer's do, the report covers what we all have known for some time. A less favorable economic outlook leads to tightening terms on commercial real estate loans. The sky isn't falling, but the world may stop turning.
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