FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN So Fannie 's and Freddie 's books may look better in some sense -- less risky -- than they really are because of all of the second mortgages going up to possibly 125 percent . '' FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN One view that I think is very prevalent is that the use of credit in the form of piggyback loans , interest-only mortgages , option ARMs -LSB- adjustable-rate mortgages -RSB- , and so forth , involves financial innovations that are feeding a kind of unsustainable bubble . FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN So the increasing use of creative financing could be a sign of the final gasps of house-price appreciation at the pace we 've seen and an indication that a slowing is at hand . FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN Those mortgages have an 80 percent loan-to-value ratio and I suppose they are being sold off to June 29-30 , 2005 37 of 234 and Freddie , there 's no need for private mortgage insurance . FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN Also , if people feel that the liquidity constraints in holding housing as an asset are diminishing , that could explain a reduced need for precautionary saving in traditional liquid assets . FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN What I 'm thinking of is the idea that equity held in residential real estate is a lot more accessible today than it has been in the past . FOMC/FOMC20050630meeting/FOMC20050630meeting--85.txt MS. YELLEN One of the things that we looked at that we thought was interesting was the behavior of price-rent ratios for residential housing and for commercial office space . FOMC/FOMC20050630meeting/FOMC20050630meeting--10.txt MR. PEACH A lesser known home price index is the constant-quality new home price index published by the Bureau of the Census -LRB- exhibit 2 -RRB- . FOMC/FOMC20050630meeting/FOMC20050630meeting--10.txt MR. PEACH 5 Another way of looking at the issue of home prices over income is to go back to the AHS data and see what is happening at various points on the distribution of all single-family homes . FOMC/FOMC20050630meeting/FOMC20050630meeting--10.txt MR. PEACH In the lower panel are plotted real improvements per unit of housing stock per year over the same period . FOMC/FOMC20050630meeting/FOMC20050630meeting--10.txt MR. PEACH Therefore , it excludes cash sales as well as purchases or refinancings financed with FHA -LSB- Federal Housing Administration -RSB- , VA -LSB- Veterans Affairs -RSB- , and jumbo conventional mortgages . FOMC/FOMC20050630meeting/FOMC20050630meeting--10.txt MR. PEACH To help us understand the biases in the OFHEO index , exhibit 5 presents the distribution by value of all single-family homes in the U.S. in 2003 , with the specific values at the 25th , 50th , 75th , and 80th percentiles . FOMC/FOMC20050630meeting/FOMC20050630meeting--378.txt MS. BIES When I look at the jump in housing prices , I 'm trying to see if consumers are saying , `` We have good , strong income growth and we 're able to afford more . '' FOMC/FOMC20050630meeting/FOMC20050630meeting--378.txt MS. BIES Two weeks ago S&P required additional June 29-30 , 2005 150 of 234 HELOCs are being used more for purchase money down payments . FOMC/FOMC20050630meeting/FOMC20050630meeting--378.txt MS. BIES So most of the mortgage originations in the 2001-2002 period were predominantly fixed-rate loans or they were ARMs that had fairly long fixed-rate periods before becoming adjustable . 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 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 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--134.txt MS. BIES We clearly could if the financial institutions were buying the equity or mezzanine risk tranches and the risks were back on the institutions ' books . FOMC/FOMC20050202meeting/FOMC20050202meeting--164.txt MS. BIES The second concern has also been mentioned by a couple of you around the table , and that is the mystery of why long-term interest rates are n't any higher than they are . FOMC/FOMC20050630meeting/FOMC20050630meeting--179.txt MR. LEHNERT In fact , I 've read in the Wall Street newsletters that some people seem to believe that the current rate of refinancing is elevated by this flow out of ARMs into fixed-rate loans . '' FOMC/FOMC20050630meeting/FOMC20050630meeting--179.txt MR. LEHNERT The other point that I 'd make is that the fraction of originations that are ARMs often can overstate the role of ARMs in the total mortgage market , because people refinance out of ARMs into fixed-rate mortgages frequently . FOMC/FOMC20050809meeting/FOMC20050809meeting--165.txt MS. BIES Since ARMs are a big chunk of the mortgage market today , we have to realize that we ca n't just look at long-term mortgage rates and the affordability of housing . FOMC/FOMC20050809meeting/FOMC20050809meeting--165.txt MS. BIES And currently those ARMs are at a point -- whether they 're adjusted annually or they started out as 3-year fixed-rate loans and then move to annual adjustments -- where they will be reset . FOMC/FOMC20050809meeting/FOMC20050809meeting--165.txt MS. BIES Also , I 'm a bit more pessimistic about what is happening with regard to some of these option ARMs and the more esoteric ARMs that are being marketed and have been marketed particularly in the last nine months . FOMC/FOMC20050630meeting/FOMC20050630meeting--9.txt MR. LEHNERT Increasing home equity , mainly driven by rising house prices , has supported mortgage credit quality in recent quarters . FOMC/FOMC20050630meeting/FOMC20050630meeting--9.txt MR. LEHNERT June 29-30 , 2005 9 of 234 Turning to the data , line 1 of the top left panel shows that the dollar value of RMBS pools has nearly doubled over the past two years . FOMC/FOMC20050630meeting/FOMC20050630meeting--9.txt MR. LEHNERT Moving to the right , the next two sets of bars show that the great majority of IO borrowers had solid credit scores between 660 and 779 . FOMC/FOMC20050630meeting/FOMC20050630meeting--9.txt MR. LEHNERT While the principal value of an IO loan does n't decline , if the initial down payment is large enough , the borrower may have a substantial equity cushion against price shocks . FOMC/FOMC20050630meeting/FOMC20050630meeting--9.txt MR. LEHNERT Moreover , as shown in line 2 , RMBS pools backed by interest-only , or IO , mortgages have increased almost sixfold , and now amount to nearly $ 300 billion . FOMC/FOMC20050630meeting/FOMC20050630meeting--9.txt MR. LEHNERT The average LTV on mortgages has declined over the past 18 months , and most households currently have substantial equity in their homes . FOMC/FOMC20050630meeting/FOMC20050630meeting--182.txt MS. BIES 180 , MS. BIES. , '' And the numbers I 've seen suggest that in the next three years 60 percent of these ARMs are going to have the rate bumped up or be refinanced .