MS. BIES
The Greenbook showed how much the subprime sector is going up ; and we know , because ARMs are a big chunk of those mortgages , that it is starting to be felt .
MS. BIES
If you look at the 2005 earnings reports of the large mortgage banks and the large savings and loans that do mortgage lending , these institutions have a really striking amount of interest rate risk embedded in their negative amortization loans .
MS. BIES
But what troubles me so much , and somebody already mentioned it , is how much the various indicators of core inflation have picked up over recent periods in the actual data .
MS. BIES
In the past few weeks , I have become aware that the rising interest rates are creating more problems for customers in servicing debt .
MS. BIES
This process just continues , and one thing that bothers me for the long run is the extent to which housing could slow this year and slow the economy .
MS. BIES
We will just continue to add to your principal , and you pay what you can afford every month versus what you really owe us on the fixed rate every month . ''
MS. BIES
So the growing ingenuity in the mortgage sector is making me more nervous as we go forward in this cycle , rather than comforted that we have learned a lesson .
MS. BIES
The buildup of home equity and the ability to borrow against it have helped individual homeowners when they have had layoffs , medical problems , divorces -- all the things in life that create month-to-month problems for cash flow .
MS. BIES
Most of you are well aware that we put out some supervisory guidance for comment awhile back on nontraditional mortgage loans , which include various forms of interest-only , adjustable-rate , negative-amortization mortgages .
MS. BIES
The longer companies see that energy prices are going to remain high or go even higher -- instead of being just a one-shot hurricane effect -- the more likely we are to see some of these prices being passed through .
MS. BIES
But the numbers have gotten so bad that now the setters of accounting standards want banks to disclose how much interest income they are recognizing as income that they have not collected , through this negative amortization .
MS. BIES
However , the 20 percent drop in purchase mortgage applications means that mortgage brokers are earning a lot less income .
MS. BIES
The moderation in energy prices and the growth in consumer income will continue to add support to the economy going forward .
MS. BIES
So predatory lending is rearing its head at the lower end of the scale , and it 's something we have to continue to watch for .
MS. BIES
I think the supply was possibly bigger than what we 're really measuring , and so we 're seeing some understating of what desired house sales would be in terms of inventory .
MS. BIES
I 'm hearing from a couple of real estate brokers that people who may have wanted to sell their homes or may have put them up for sale are withdrawing them from the market .
MS. BIES
Let me just make a few comments and give you recent feedback from some exams and dialogues with brokers that I 'd like to share with you .
MS. BIES
If they do n't close a transaction , most of them get no paycheck because three out of four mortgages are originated not in financial institutions but by independent brokers .
MS. BIES
We might have had some spillover effects from rising commodity and energy prices earlier on , but I was hoping at this point that , with the reversing , we would see more-positive spillover effects that would mitigate inflation .
MS. BIES
I thought I 'd start today talking a bit about housing markets and the condition of banks right now .
MS. BIES
I 'm hearing more from banks that , since we 've stopped raising rates , they 've lost the nice little lag effect -- the ability to wait for us to move before lagging along .
MS. BIES
I 'm hearing this from folks who understand that the quality of what goes into those pools varies tremendously when you do n't have the Fannie Mae and Freddie Mac framework for the underwriting .
MS. BIES
We 're seeing that some of the private-label mortgage-backed securities are having very high early default rates or delinquencies in the mortgages , which usually means that the originator has to buy them back out of the pools .
MS. BIES
So those pressures are going to be more of a challenge for them , especially with a flat or inverted yield curve , depending on where they 're funding and lending .
MS. BIES
Banks are still getting some of this business and putting it on their balance sheets , and it is part of the growth of what you 're seeing the banks funding .
MS. BIES
I think we 'll see that bottom in housing sales long before we see it on the construction side because there 's a large amount of inventory still to work through .
MS. BIES
When I looked again at the graph that I love in the Greenbook that shows where our forecast has been , I was struck that we 've seen the forecast of GDP growth continuing to moderate in the past several months but our expectations of inflation are actually flat to up a bit .
MS. BIES
It 's not back to where it was in my money supply days , when I started my career at the St. Louis Fed ; but I do worry that liquidity is , as some of you have said , causing a lot of transactions to occur that economically perhaps would n't otherwise occur .
MS. BIES
The bit of softness that I 'm hearing about from some of my contacts in sectors outside housing and mortgages warns me that we need to be a little more vigilant than I had been expecting about growth maybe softening in a broader sense .
MS. BIES
But the fact that inflation continues to be above 2 percent in the forecast period is something that does concern me , and I think part of my concern relates to the tremendous amount of liquidity that sits out there in the banking sector , in the U.S. financial markets , and clearly globally .