WASHINGTON — U.S. banks are toughening standards for home mortgages and commercial real estate development loans, seeing more sluggish demand and predicting further delinquencies, according to a Federal Reserve survey released Monday that added to concerns about the faltering economy.

The quarterly survey made it clear that a credit crunch, which started last summer with rising defaults in higher-risk subprime mortgages, has spread to better-off consumers. Nearly 55% of U.S. lenders responding to the survey had tightened standards for prime mortgages in the quarter. That’s up from 40% in the previous Fed survey.

About 60% of U.S. banks instituted tougher criteria for revolving home-equity credit lines. And 80% of domestic lenders set higher standards for commercial real estate development loans, the highest level since the Fed started asking that question in 1990.

“Banks are increasingly unwilling to lend, even to creditworthy borrowers,” Moody’s Economy.com said in an advisory to clients. “A major risk to the outlook is that lenders overtighten credit standards.”

The Fed survey covered a swath of U.S. and foreign banks for the three-month period ended Jan. 17. It was completed before the Fed cut a key interest rate by an aggressive 1.25 percentage points in two moves on Jan. 22 and Jan. 30, noting that credit had tightened for some firms and consumers.

The Fed has cut the federal funds rate — what banks charge each other for overnight loans — from 5.25% in September to 3% now. Many lenders use that rate as a benchmark in pricing business and consumer loans.

Some analysts say financing is available, if pricey. “Good companies … are still capable of borrowing. Their costs may have gone up slightly,” says Roland Chalons-Browne, CEO of Siemens Financial Services, which provides financing to businesses. “If you are a manufacturing company that is making something sensible with a halfway decent business plan, I still think there is money available.”

David Rosenberg, North American economist at Merrill Lynch, notes that despite the Fed rate cuts, credit markets remain constricted.

The difference between interest rates on U.S. Treasury bonds, for example, and some other interest-bearing products has widened, a sign of a deteriorating credit environment.

In broader credit markets, rates on high-yield, high-risk junk bonds are now 7 percentage points higher than Treasury bonds of comparable maturity, up from about 3 percentage points a year ago.

About 75% to 85% of domestic and foreign banks expect some deterioration in loan quality.

Contributing: Barbara Hagenbaugh (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc. <!—->

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