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Commercial and retail real estate lending standards have tightened significantly at major banks as lenders remain nervous about the broad economic environment, fall-off in market liquidity and downturn in residential housing markets across the U.S.

So says an annual Treasury Department survey released Thursday that looks at underwriting standards across the banking industry over the 12 months ending March 31. The survey covered 62 of the largest national banks, which together held loans totaling $3.7 trillion at the end of last year, or around 83% of all loans in the national banking system as of Dec. 31. Examiners looked at credit trends across the gamut of commercial and retail credit products, from residential first mortgages to commercial leasing to credit card lending.

After four consecutive years of “increasingly accommodative credit terms” the degeneration of financial markets in 2007 has led most banks to conclude that they’re less interested in risk and more interested in changing tack on loan standards and returning to “fundamental credit principles,” the survey’s authors at the Office of the Comptroller of the Currency wrote.

That account is in line with analyst warnings that banks face ongoing risk from exposure to bad loans. In a note to clients Friday Morgan Stanley analyst Betsy Graseck said she expects “cumulative loss forecasts to rise in residential mortgage related loans as housing values fall, in consumer loans as credit availability shrinks, and in commercial loans as consumer spending slows.”

Lenders have already begun to exercise some of the prudence in lending that the OCC sees continuing ahead – net tightening of underwriting practices for commercial residential construction, for example, rose to 62% of institutions in the year ending March 31 from 33% a year earlier and 11% in 2006. Only 2% of banks eased CRE lending standards in the most recent period, the agency said.

Fitch Ratings expects homebuilders will have to take more concessions at lenders in loan negotiations down the road. “Most of the public builders that Fitch tracks have negotiated new revolving credit agreements either late last year or so far in 2008,” the ratings agency wrote in a U.S. housing report last week. “Nevertheless, some builders may have to revisit their bank syndicates and request further covenant adjustments, especially relating to tangible net worth. During more recent negotiations banks have been lowering commitment amounts and charging higher fees.”

Banks are more vigilant when it comes to retail lending, too. Some 68% of retail lending institutions raised overall underwriting standards in the past year, up from 13% in 2007 and 7% in 2006 — a “major change from the past three surveys,” the OCC said. Residential real estate lending criteria tightened at 56% of banks this year. Additionally, high loan-to-value home equity loans, which typically exceed the value of a home, were harder to get at 89% of banks, compared with a 17% tightening a year earlier. The bar for conventional home equity underwriting was raised at 52% of institutions this year, up from 16% in 2007.

“Tightened credit standards should continue to largely offset improving affordability,” Fitch Ratings said of the current housing scenario. “The market for subprime loans is essentially non-existent, and within Alt-A, only a limited number of prime-like Alt-A loans are currently being originated,” the agency added.

Earlier last week Credit Suisse estimated 2008 residential mortgage originations at $1.65 trillion, the lowest level of activity since 2000.

Every bank surveyed by the OCC sees greater risk ahead in HLTV home-equity lending and more than two-thirds expect greater risk with conventional home equity loans. Some 60% of banks told the OCC they see more risk ahead in residential real estate lending.

Given the volume of housing loans outstanding, continued mortgage trouble ahead could sting banks. First lien and second lien mortgages account for about 40% of large-cap bank loan portfolios, Graseck said. As broad economic conditions deteriorate, and housing values continue to plummet, loan losses are accelerating, she said. Large-cap banks have so far taken only $48 billion of the total $229 billion in provisions Graseck expects from the fourth quarter of last year through the fourth quarter of next year.

The liquidity drought that sent banks and brokers running for cover in the second half of 2007 may have taken a bite out of more than just Wall Street, according to a recent study published by the Department of Commerce’s Bureau of Economic Analysis. Authors Thomas Howells III and Ralph Stewart said the downturn in the finance and insurance industries accounted for nearly half of the slowdown in economic growth during 2007.

“Overall, 13 of 20 private industry groups contributed to the slowdown in real gross domestic product (GDP) growth,” Howells and Stewart said. “[F]our industry groups (finance and insurance, construction, real estate and rental, and mining) accounted for about one quarter of GDP in 2007. However, they accounted for nearly 80% of the slowdown in economic growth.” GDP growth fell to 2.2% in 2007 from 2.9% in 2006, according to the study, while the finance and insurance industries’ value-added (a measure of an industry’s contribution to GDP) fell 0.3% in 2007 after rising 9.8% in 2006.

Within the private goods-producing sector, the study said growth in the value-added price index for construction slowed sharply, increasing 1.6% in 2007 after an increase of 10.3% the previous year. In contrast, the agricultural, forestry, fishing and hunting industry group turned higher, growing 26.9% in 2007 after contracting 3.5% in 2006.

Elsewhere, the information-communications-technology industries continued their double-digit growth, rising by 13.2% in 2007 and accounting for 22.3% of real economic growth. Howells and Stewart also said the utilities industry was the largest contributor to decelerating value-added price growth in the private services-producing sector; prices increased 2.8% in 2007 after increasing 12.1% the previous year.

Increased volatility and multibillion dollar write-downs have kept many investors on the sidelines of the financial sector. And now, dividend cuts from major banks may be the next shoe to drop. At Wachovia, at least, the chance of a dividend decrease is about even, according to Merrill Lynch.

“We now think there is a material chance of an approximate 50% dividend cut in the second half of 2008 or the first half of 2009,” Merrill Lynch said in a note to clients.

The brokerage noted that Wachovia is “saddled” with $5.8 billion in non tax-deductible preferred equity with an 8% interest rate. Merrill Lynch argued that the bank’s first $464 million of annual net earnings will go to preferred equity holders instead of common equity holders and that if Wachovia doesn’t cut its dividend, it will have to generate $5.54 billion in annual net earnings just to service preferred and common dividends.

But is this something banks are willing to do? U.S. banks paid more than $110 billion in cash dividends during 2007, a nearly 18% jump from 2006, according to the Wall Street Journal, which cited data from the Federal Deposit Insurance Corp. ”That cash would have more than covered the roughly $100 billion in credit-related write-downs banks took last year,” the Journal reported.

Those write-downs depleted available capital for banks to cover potential losses and, as a result, banks have had to raise more than $76 billion in fresh capital by issuing preferred or convertible shares with even higher dividend yields than the common stock, the Journal said.

Some big banks did cut their dividends in the fourth quarter, including Citigroup and Freddie Mac, by 40% and 50%, respectively. But is that enough?

Following Federal Reserve Board Vice Chairman Donald Kohn’s comments Tuesday, in which he predicted further loan delinquencies and asset write-downs at major Wall Street banks, investors appeared doubtful. The Financial Select Sector SPDR ETF was down about 2.5% near midday.