Financial Update - Volume 19, Number 3 - Fed Gov. Bies Addresses Mortgage Markets
Vol. 19, No. 3,
Third Quarter 2006
Fed Gov. Bies Addresses
The ability of real estate markets to affect the U.S. economy in both negative and positive ways makes the Fed's supervisory role essential, she said while addressing the Mortgage Bankers Association Presidents Conference in mid-June.
Residential real estate activity moderates
Noting that recently housing starts have declined and inventories of unsold homes have increased, Bies said that a residential real estate slowdown is occurring gradually. "The underlying fundamentals of housing demand also remain favorable," she said.
Regarding the residential housing market, Bies said mortgage debt accumulation bears watching. Outstanding home mortgage debt has risen about 50 percent since the end of 2002, she said, and that increase has substantially pushed up homeowners' mortgage payments in relation to their income, despite historically low mortgage interest rates.
Nontraditional mortgage products raise questions
New mortgage products such as interest-only loans and mortgages for which the borrower has flexible payment options have existed for years. However, more recently, they have been offered to subprime borrowers, who might not qualify for a traditional mortgage with the most competitive interest rate available. Some lenders are also requiring less documentation to determine a loan applicant's creditworthiness. These factors could form a potent reversal for borrowers who become stretched when interest rates rise, Bies said.
"We are watching for any signs that defaults may be on the rise," she said. "Some industry evidence indicates that delinquencies may be on the uptick; delinquency rates for loans issued in 2005 are, in most cases, higher than those for comparable loans issued in earlier years."
Commercial real estate market also merits attention
Bies said that even though conditions in commercial real estate (CRE) appear to be improving, banks must assess their appetite for risk when they concentrate capital in CRE. She noted that the average CRE concentration for some banks is about 300 percent of total capital, whereas in the late 1980s the level was about 150 percent. "Therefore, banks should not be surprised by the emphasis in the proposed CRE guidance on concentrations and the importance of portfolio risk management," she said.