Blog: Spirit of Money, Financial Fluidity
by munificent

"Frothy" Real Estate Lending?

Lending Policies to slow down the housing market???

Date:   6/15/2005 9:20:44 AM   ( 16 y ) ... viewed 1543 times

UPDATE 2-Fed's Bies eyes guidance on real estate lending
Tue Jun 14, 2005 03:20 PM ET
(Recasts, adds details)
WASHINGTON, June 14 (Reuters) - Huge price gains in an ever-hot U.S. housing market may be pushing buyers to speculate on real estate and driving lenders to lower their standards in handing out loans, a Federal Reserve governor said Tuesday.

Overall credit quality remains "good," but federal regulators want banks to maintain sound lending practices and consider the ability of borrowers to meet their obligations, said Federal Reserve Gov. Susan Bies.

Her comments add to a series of warnings from Fed officials, including Chairman Alan Greenspan, regarding four years of price gains in U.S. real estate markets -- a run seen by some economists as unsustainable in the priciest markets.

Bies said concerns are not limited to residential housing markets, and that Fed officials are considering supervisory guidance to the banks they oversee on sound risk-management practices for commercial real estate exposures.

That would come on top of guidance in May from the Fed and other regulators warning that lenders may not be fully gauging the risks associated with home equity loans and lines of credit.

"Overall, the credit quality is good. But we are beginning to see in some markets, with some customers and banks, where people are buying property now in anticipation of rising values," she said.

"When you start to push to buying homes in anticipation of rising property values, safety and sound lending says you should look at the ability to service the loan first and we want to keep to that sound practice," she said.

More regulation, however, is not needed, Bies told reporters on the sidelines of a banking conference.

"I don't think we need any more regulations," she said.

Stubbornly low mortgage rates have fueled the housing boom. Even though the Fed has raised its target for short-term interest rates in eight quarter-point steps to 3.0 percent, long-term interest rates have remained low. In fact, average 30-year fixed-rate mortgages remain lower than a year ago, according to finance company Freddie Mac.

Bies said regulators worry that competitive pressures could be driving banks to lower their underwriting standards -- thereby fueling speculative behavior.

In "the inevitable downturn," credit quality could deteriorate to the extent that some banks would experience significant losses, she said.

The Fed governor said the recent growth of interest-only mortgages, adjustable-rate loans and home equity lending raise red flags about slipping loan underwriting standards.


Bies is not alone in stressing a strategy of issuing guidance about lending rather than strengthening regulation.

Other Fed officials, as well as the chairman of the Federal Deposit Insurance Corp., have consistently pointed to the May guidance on home equity lending as an example of steps they can take to push lenders to tighten their standards.

But some analysts said recent guidance has not had a meaningful impact. Investment advisory firm ISI Group said it surveyed banks on the new guidance and found "virtually no impact on lending standards."

"More regulatory action probably lies ahead," the analysts wrote to clients.

© Reuters 2005. All Rights Reserved.

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