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Bies warns on risky lending practices

Bies warns on risky lending practices
By Pascal Pinck
Reuters
Wednesday, October 12, 2005; 1:34 PM

BEVERLY HILLS, California (Reuters) - Federal Reserve Board Governor Susan Bies issued a warning on Wednesday on risky real-estate lending practices, saying banks could be hurt by higher interest rates or a decline in home prices.

"Banking supervisors have become concerned recently about apparent increased risk-taking in both commercial and real estate lending," Bies told the National Bankers Association annual convention in Beverly Hills, California.


Bies said regulators had seen an easing of underwriting standards as banks competed to extend home equity loans.

"There is some concern that banks' home equity loan portfolios may be vulnerable to a rise in interest rates and, in some markets, a decline in home values," she said.

Bies' remarks were the latest in a series from U.S. bank regulators expressing concern over interest-only loans and other types of nontraditional, or "affordability," mortgage products that have allowed homebuyers to purchase homes that would have been otherwise unaffordable.

"From the point of view of bank supervisors, affordability products do not necessarily pose solvency concerns," she said, adding that most homeowners had "a significant" equity cushion.

Bies also said banks were generally well-capitalized, "which means that (home) prices could fall significantly without leading to a significant number of bank failures."

She said regulators were conducting a survey of banks' so-called affordability lending practices and said they might offer regulatory guidance on the subject in the near future.

Bies noted U.S. housing prices had jumped 13.4 percent in the second quarter from a year ago -- the biggest gain in more than a quarter century -- and said speculative buying appeared to be a factor behind the increase.

She also said regulators had concerns on commercial real estate lending and said Fed staff were considering supervisory guidance on commercial lending exposure, with the goal of issuing guidance on behalf of all the U.S. bank regulators.

Bies walked through recent regulatory announcements on bank capital proposals and said the Fed would be issuing a paper before the end of the year on how the so-called Basel II capital accord might impact banks' credit card businesses.

She also said the Fed needed to come to a better understanding of why some minority borrowers often pay higher rates than whites, saying the data "raise legal issues of compliance with fair lending laws."

Taking questions from the audience, Bies said regulators had to tread carefully in dealing with racial disparities in lending to avoid placing such a heavy regulatory burden on banks that they stopped lending to the very people regulators were intending to help.

She also said many of the high-cost loans were being extended by mortgage brokers and finance companies outside the purview of federal regulation.

"A lot of this is going to have to be dealt with at the local level, because as a federal regulator we don't have the power to go in and do anything," she said.


LINK: http://www.washingtonpost.com/wp-dyn/content/article/2005/10/12/AR2005101200949.html