Region's Economic Conditions--The current recession is less severe than the downturn during the early 1990s; however, certain information technology industries have been affected more negatively by the recent weakness. Thus far, the housing sector has remained robust, but areas that recently experienced significant price appreciation may falter, especially if the recession continues.
Housing Market Has Held Up Well in This Recession, but Some Issues Raise Concern--Recent trends in mortgage underwriting are of particular interest, as an estimated $2 trillion in mortgage debt, approximately one-third of the total outstanding, was underwritten during 2001. Nonconstruction residential mortgages traditionally have represented one of the better-performing loan classes during prior downturns. The level of credit risk, however, may be higher this time around because the mortgage lending business has changed since the last downturn. This article examines these changes, including increased involvement by insured institutions in the higher-risk subprime credit market, the acceptance of higher initial leverage on home purchases, and greater use of automated underwriting and collateral valuation processes, which have not been recession-tested.
Home price softening could have an adverse effect on residential construction and development (C&D) and mortgage portfolios. In the aggregate, the level of risk appears modest. However, insured institutions with significant C&D loan exposures in markets that experienced ongoing residential construction during 2001, despite slowing local economies, are at higher risk. Weakening home prices could hurt loan quality in selected markets. The San Francisco Bay Area stands out as a place to watch in this regard.
By Scott Hughes, Regional Economist Judy Plock, Senior Financial Analyst Joan Schneider, Regional Economist Norm Williams, Regional Economist