Fallout from the credit crisis is spreading down Main Street, threatening to worsen the U.S.
Banks and other lenders, from the nation's largest to those with only a few branches, say they are tightening lending standards -- and not just for home loans.
The tightening could worsen an already weakened outlook for jobs and the economy. Businesses may have trouble borrowing what they need to grow, and consumers may have to cut spending as mortgage costs and credit card fees increase.
An example of a lender that has grown more cautious is Astoria Financial Corp, a Westbury, New York savings and loan with $21.7 billion of assets.
It has cut the maximum size of some home loans, and stopped residential lending in 15 of 44 U.S. states. Large housing markets such as California, Florida, Michigan and Ohio deteriorated too far, it said.
"Home sales are dropping off very significantly," Chief Operating Officer Monte Redman said. "We need to be prudent."
According to the Federal Reserve's January survey of senior loan officers, nearly all respondents expected credit quality to weaken, or at best stay the same, in nearly every
major lending area.
One-third of U.S. banks tightened lending standards on commercial and industrial loans over the prior three months, and 80 percent tightened on commercial real estate loans. And
55 percent even made it harder to obtain prime mortgages.
Banks are pulling back in part because of rising customer defaults. Some have also lost billions of dollars on subprime mortgages and complex debt securities, reducing capital available for other lending.
The transformation of a liquidity boom of a year ago into a bust has banks reexamining their approach toward risk.
"There was more money lent than customers could pay," said Dick Evans, chief executive of Cullen/Frost Bankers Inc , a San Antonio bank with $13.5 billion of assets that quit residential real estate lending in 2000.
"The industry is adjusting to a more rational credit environment," he added, "which will equal slower growth."
The Fed survey shows how a credit crunch once centered on subprime mortgages has expanded to a wider array of borrowings. This could harm the economy, despite the prospect of further Fed rate cuts following two in January.
"Some banks don't know the extent of losses they might have," said Stuart Plesser, a Standard & Poor's equity analyst.
"Even for some banks that raise capital, they will want to be cautious with lending and growing their balance sheet, so they don't have to tap credit markets again."
Citigroup Inc, Merrill Lynch & Co and Morgan Stanley have collectively raised more than $41 billion to shore up capital in the last three months, including from sovereign wealth funds in Abu Dhabi, China, Kuwait and Singapore.
Bank of America Corp and Wachovia Corp together raised more than $16 billion from selling preferred stock. Others have also raised cash to boost capital depleted by acquisitions, dividends or credit losses, or a combination.
Kenneth Lewis, who runs Bank of America, last month said the industry faces "easily the toughest environment" by far in his 6-1/2 years running the largest U.S. retail bank.
More problems may be in store for the industry.
Analysts warn of tens of billions of dollars of additional write-downs, on top of more than $140 billion already incurred from mortgages, credit losses and complex debt.
Write-downs led UBS AG Thursday to post an $11.3 billion fourth-quarter loss. The Swiss bank said it still has $27.6 billion of subprime exposure, plus $26.6 billion of exposure to "Alt-A" mortgages, also below prime in quality.
Still lurking: Possible losses on $200 billion of loans to fund leveraged buyouts, but for which there are no buyers.
Several analysts said this could be the next shoe to drop.
"The precipitous drop in loan values (has) resulted in a sharp curtailment in lenders' ability and willingness to provide capital for future transactions," wrote Friedman Billings Ramsey & Co's Paul Miller. He estimates such write-downs might hit $20 billion.
"Credit got terribly easy," said Ronald Hermance, chief executive of Hudson City Bancorp Inc, a $44.4 billion asset, Paramus, New Jersey-based lender that has avoided big losses despite specializing in residential mortgage lending.
"The appetite for esoteric products was so wide and so deep," he added. "If institutions like Citigroup or Merrill Lynch write off billions of dollars, they may address problems on their end, but they haven't solved borrowers' problems."
Policymakers are concerned. "More expensive and less available credit seems likely to continue to be a source of restraint on economic growth," Fed Chairman Ben Bernanke told the Senate Banking Committee Thursday.
Credit is getting harder to come by even at banks so far spared the worst of the credit crunch.
JPMorgan Chase & Co, the third-largest U.S. bank, has "massively tightened up" subprime mortgage and home equity lending, Chief Executive Jamie Dimon said Feb 7.
Healthier borrowers can also face drier spigots. American Express Co is focused on "the right credit criterias we should use even for the broad population," Chief Financial Officer Dan Henry said last month.
"The bottom line is profitability," said Curtis Arnold, founder of CardRatings.com in Little Rock, Arkansas. "If banks feel serious delinquencies are spiking, even raising rates on good customers is a way to hedge risk."