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With the Capital Region’s housing market taking a projected 15 months to absorb an oversupply of new houses, some lenders are more carefully scrutinizing new residential developments and paring back on larger loans.

New Orleans-based Fidelity Homestead Savings Bank’s niche is residential lending. But President/CEO Boyd Boudreaux, chairman-elect of the Louisiana Bankers Association, says his bank has diversified its loan products to provide a buffer from market changes.

Even though the bank’s profits were squeezed last year by short-term interest rates exceeding long-term rates, Boudreaux says the health of Louisiana’s banking industry is excellent.

“We’ve seen some slowdown,” he says, “but not a significant amount at this time. If it continues, we may see a significant slowdown. Right now, we’re seeing a retraction until the market absorbs it and, until it absorbs it, you won’t see a lot of new building.”

BancorpSouth President Larry Denison says his bank is making loans for houses up to $417,000 but has cut back on lending above that price unless they’re custom or presold. In light of tougher loan standards, more people are getting FHA [Federal Housing Association] loans that are more lenient on credit scores and require a smaller down payment.

Denison says the Tupelo, Miss.-based bank won’t be affected by a softer market because it focuses on commercial lending, which is “still rocking and rolling.” He anticipates the previous quarter and upcoming quarter to be the strongest the bank has had in three years, with a robust demand for projects like office complexes, owner-occupied buildings, parking lots and manufacturing facilities, which are offsetting fewer housing developments in the mix.

“Baton Rouge still has the issue of needing quality office and warehousing space,” Denison says, “and enough businesses are doing well and expanding facilities.”

Sal Bernadas, president of the Louisiana Mortgage Lenders Association, says there’s a slowdown in mortgages, depending on the area, and he singles out the credit crunch as its biggest cause. Consumer demand is still there, but people aren’t qualifying for loans because they need a higher credit score and at least a 20% down payment. A year ago, a borrower could get loan with nothing down. In many cases now, a prospective buyer can’t get a loan until any blemishes on their credit report have been cleared up or removed.

“I don’t know anybody that says business is booming,” Bernadas says. “If the credit crunch went away, things would be instantaneously better.”

Estimating at least one-third fewer house transactions have been closed this year compared to last year, he questions Fannie Mae and Freddie Mac’s tighter one-rule-fits-all approach for healthier, low-risk markets like Louisiana.

Bernadas has seen a surge in FHA loans, which are more time consuming to get, and conventional loans, which have stiffer standards. A year ago, a loan could be arranged in less than a week, but today it takes 30 to 40 days to get an FHA loan and up to 30 days for a conventional loan.

“The biggest problem is every deal we try to close now takes two to three times the effort,” he says, adding some real estate agents now require a prequalified letter to show houses. “It’s a lot more work to get those same residents to close now.”

Rod Russell, executive director of the Louisiana Mortgage Bankers Association, agrees.

The market’s volatility stems from constant changes in loan guidelines, rates hitting an eight-month high, higher credit requirements and Fannie Mae and Freddie Mac not buying jumbo loans to ease the housing crisis. This hurts the market for homes $417,000 and above because the loans are difficult and expensive. For example, St. Tammany Parish has a 10- to 12-month inventory of houses around $250,000 and a three-year inventory on houses $1 million and above.

“All this greatly reduces the pool of qualified buyers,” Russell says.

Boudreaux doesn’t anticipate a major decline in the market, but the construction sector could feel the pinch until the oversupply is absorbed.

“We haven’t seen the depression of prices we saw in the real estate market in the 1980s and ’90s, and don’t expect to see it,” he says.

An encouraging sign is builders “are trying to be smart and not overbuilding,” Boudreaux says. While East Baton Rouge Parish residential and commercial building permits steadily rose to 27,649 in 2006, they fell to 27,312 last year.

Also, banks are scrutinizing development projects more, such as ensuring a proposed subdivision marketing plan calls for houses that can be absorbed by the market, he says. A builder with a project calling for houses in the $125,000-to-$175,000 range is more likely to get a loan because there’s still a decent market for that price in the Capital Region. But getting a loan for a project with larger houses in the $200,000 to $250,000 range is less likely because they take longer to sell.

Also, Boudreaux maintains there is no credit crunch in southeast Louisiana because “the community banks have always held their standards” for sounder lending. That didn’t happen in many of the nation’s housing bubbles, where artificially high housing values attracted riskier or fraudulent lending. Southeast Louisiana maintained stable prices, but he warns a lingering surplus could invite 5% to 10% price declines in areas with surpluses like St. Tammany Parish.

Increases in homeowners insurance are a substantial factor in the slowdown, a situation worsened by inflation and steadily rising fuel costs. “In the past, a person could move up to a larger home, but you don’t see that as much now,” Boudreaux says. “They’re holding on to what they have.”