'Unmanageable Payment Shock' Seen: Bies

A Fed official had this to say about home loans this morning. "Regulators are concerned about heavy commercial real estate exposures and risky mortgage lending practices at U.S. banks, Federal Reserve Board Governor Susan Bies said on Thursday. 'There are certain rapidly growing business lines in banking operations that are placing pressures on risk-management systems,' Bies (said) as she outlined guidance regulators have issued on commercial real estate and so-called nontraditional mortgage lending." "In discussing the guidance on exotic mortgage products, such as interest-only loans, Bies repeated that government regulators were concerned risk-management practices had not kept pace with the risks that these widely available loan products could present. She also cautioned those risks could be 'heightened by a downturn in the housing market.'" "Bies said that in the past such products were normally offered to higher-income borrowers only, but they now were being extended to low-income borrowers in the subprime market. 'These borrowers are more likely to experience an unmanageable payment shock at some point during the life of the loan, which means they may be more likely to default on the loan,' she warned." "Bies also expressed worry that banks could face difficulties if abnormally low risk-spreads in capital markets increased. 'When risk spreads return to more 'normal' levels, banks need to be prepared for the resulting impact on liquidity and pricing,' she said." "Bies added that regulators had observed that lenders were increasingly combining nontraditional mortgage loans with weaker controls on credit exposure. 'The absence of traditional underwriting controls may have unforeseen effects on losses realized in these products,' she said." And Inman News has this related report. "Foreclosure activity in California edged up in fourth-quarter 2005, according to DataQuick. Lending institutions sent 14,999 default notices to California homeowners from October to December, up 19 percent from 12,606 for the third quarter, and up 15.6 percent from 12,978 for fourth-quarter 2004." "'Because of the rise in home values, much of that financial distress has been covered by the increasing amount of equity that people have had in their homes. That equity is now being created at a slower pace, and default activity is inevitably on the rise,' said Marshall Prentice." "The median amount owed when the default notice was recorded was $6,862 in fourth-quarter 2005, up from $6,130 for the same period a year ago. All regions of the state saw an increase in foreclosure activity, ranging from 10.5 percent in the Bay Area to 19.6 percent in Southern California. In Southern California, the number of notices jumped from 1,123 to 1,607 (43.1 percent) in Riverside County; from 872 to 1,173 (34.5 percent) in San Diego; from 684 to 918 (34.2 percent) in Orange County." "In Northern California, the number of notices increases from 636 to 849 (31.4 percent) in Sacramento County and from 73 to 106 (45.2 percent) in San Francisco. On a loan-by-loan basis, mortgages are least likely to go into default in Marin County. The likelihood is highest in the Central Valley and Inland Empire." "'While foreclosure properties tugged property values down by almost 10 percent in some areas nine years ago, the effect on today's market is negligible,' DataQuick reported."