Mortgage demand up, 1st time since '07: Fed survey

WASHINGTON (Reuters) - Demand for prime mortgages rose in the first quarter for the first time since early 2007, even as banks tightened standards for home loans, the Federal Reserve said in a survey of loan officers released on Monday.

About 35 percent of U.S. banks saw stronger demand for top quality home loans in the quarter, a "substantial" change from the 10 percent that reported weaker demand in the January survey, the Fed said in its April Senior Loan Officers Survey on bank lending practices.

Only two banks said they were making subprime loans -- loans to borrowers with blemished credit that played a major part in the credit crisis that has caused the worst financial meltdown since the Great Depression.

In a sign some of the strains from the worst financial crisis since the Great Depression may be fading, U.S. banks eased standards for business lending. Terms had tightened on loans to large and middle-market firms in each of the eight previous quarters and to small firms for 10 straight quarters.

The Fed said banks eased standards for consumer loans other than credit cards as well.

While the proportion of banks reporting such tightening is large, the April survey marked the first time since January 2008 that the share fell below 50 percent, the Fed said.

The share of respondents who had tightened standards for home equity lines of credit was down, and demand for home equity lines of credit was lower, the Fed said.

Domestic banks left their standards for credit card loans unchanged, the Fed said.

Demand for other types of loans fell in the quarter.

Banks said credit quality is likely to deteriorate for the rest of the year if consensus forecasts for the economy prove on target.

Banks providing trade credit said they had tightened standards over the previous six months.

Banks that tightened standards or terms for international trade finance cited the uncertain economic outlook in the United States and abroad, higher country risk, and worsening industry-specific problems as reasons.

The Fed polled 53 domestic banks and 23 branches of foreign parents for the survey.

(Reporting by Mark Felsenthal, Editing by Chizu Nomiyama)