FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW And in the event of a sharp drop in housing prices , the odds of a spillover to financial institutions seem limited . FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW We 've all talked about the possibility of local housing bubbles and regional housing bubbles , and clearly there are some in the United States . FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW I wondered whether the price-rent ratios in other countries that may not have had the same degree of financial innovation we 've had differ substantially from ours . '' FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW First , I 'd say that with all of the concerns about froth in housing markets , I found these presentations to be very informative , and I want to congratulate the people who spent a lot of time preparing them . FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW The role of securitizing mortgages is to lay off risks to parties who are willing and able to bear the risks . FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW Moreover , the credit risk associated with home mortgages seems to be spread out across many institutions . FOMC/FOMC20050630meeting/FOMC20050630meeting--137.txt MR. MOSKOW Capital levels of the financial institutions are relatively high , so it appears that these markets are performing their roles well . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON There is evidence of a lack of secondary market discretion , including the ability to price for risk ; the risk premium simply does not reflect the risk embedded in that product . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON According to some lenders , about 20 to 25 markets bear careful watching , and lenders have started to exercise restraint in those markets . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON To date , foreclosures have been limited and minimal at banks and bank mortgage June 29-30 , 2005 154 of 234 secondary market . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON This does not address the question that President Guynn raised about the risks associated with the activities of contractors or real estate developers , which is a separate and very significant risk . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON It sounded to me very similar to what the 1960s New York Yankees were doing with the old Kansas City A 's under Charlie O. Finley -- using them to improve asset quality . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON There have been some indications that the secondary market is starting to tighten its standards , one of which Susan mentioned , which is the new guidelines from Standard and Poor 's . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON Mr. Chairman , I did not address the statement today because I see no need to adjust our `` measured pace '' language or to make any other significant adjustment to our statement at this meeting . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON The mortgage sought by the borrower would exceed the maximum of Fannie or Freddie , automatically making it a nonconforming loan and automatically removing the risk parameters that are embedded in the conforming product . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON A great deal of uncertainty , frankly , surrounds the interest rate risk exposure , because there have been very few adverse interest rate periods in recent years and the industry experience is limited . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON And there is no slowing in sight , despite all the warnings that we have heard and indications in some markets that there has been a leveling , and even a decline , in some property values . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON I talked to contacts at banks , nonbanks , and one of the large subprime lenders and asked them to approach the question from the same perspective . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON Or , as Susan mentioned , another good example is the investor who is concerned about the equity markets and wants to move into residential real estate . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON Because it is nonconforming , it opens the opportunity for the Alt-A product , which means that it June 29-30 , 2005 153 of 234 associated with that instrument does not seem to be captured in what the secondary market is looking for . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON The place to look for the first evidence of weakness would be in the first-loss position , wherever that first-loss June 29-30 , 2005 155 of 234 and disseminator of risk or if those in that market will be the last to recognize the risk that 's embedded in what they 're doing and know how to price it . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON One lender told me that they are using the secondary market first of all for their conforming products ; second , for their nonconforming products ; third , for their HELOCs ; and fourth , for loans on first delinquency . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON While that environment is clearly likely to produce unrecognized risk somewhere in the financial system , it seems unlikely that that risk will be in any of the portfolio lenders , including the bank lenders , to any significant extent , because of the avaricious nature of the MBS -LSB- mortgage backed securities -RSB- market . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON But the availability and proliferation of FICO scores means that interest-only and high loan-to-value mortgages are given only to those within certain FICO bands , where the lender has the greatest confidence in the borrower 's repayment capability , which is based on the historical experience of that borrower in terms of his or her debt repayment record . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON One of them is the typical purchaser of a vacation home ; Jack Guynn is buying in the Blue Ridge Mountains , for example . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON Also becoming more popular is what is known as the alt-A mortgage product , which makes loans based on stated incomes and stated assets , and carries a higher interest rate in exchange for fewer verifications of the income and asset figures provided by the borrower . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON It may get at the question that President Yellen asked as to where the ultimate source of the stupidity is in the market -- not whether or not there is stupidity in the market . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON What attracts your eye because it 's new , and where do you see the risks embedded in the nature of the mortgage market today ? FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON To date , loan delinquencies have remained modest , both within and outside of the banking industry . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON There is a lack of consensus as to how the relaxation of credit standards will impact safety and soundness . FOMC/FOMC20050630meeting/FOMC20050630meeting--380.txt MR. OLSON The originator of the loan is able to meet the competition and rid itself of that risk .