FYI - An Update on Emerging Issues in Banking

Economic Conditions and Emerging Risks in Banking

November 4, 2003 

This paper was provided to the FDIC Board of Directors today as part of "The FDIC Insurance Funds 

Outlook and Premium Rate Recommendations for the First Semiannual Period of 2004." 

With Improving Economy, Concerns Shift to Interest Rates

The two main economic concerns of the past two years, a lack of new jobs and lackluster business 

investment, finally appear poised to subside. Improved job prospects and more evenly distributed 

economic growth should further reduce credit risk, while possibly lifting demand in the moribund 

commercial and industrial loan market. As overall loss rates subside, particularly in the C&I and credit 

card segments, risks related to rising interest rates may move to the forefront of concern for insured 

institutions.

A stronger economy will benefit credit quality. However, the higher interest rates that usually accompany 

an expanding economy could elevate some banks’ interest rate risk and cause problems in both the 

consumer and commercial real estate sectors. For example, rising rates will lead to greater asset 

extension risks, especially for institutions holding large amounts of mortgage-related assets. Also, some 

borrowers with limited financial wherewithal, such as subprime customers, or those with adjustable rate 

mortgages, may see cash flows squeezed by rising debt service payments. In combination with the 

potential for some weakness in home prices, and thus reduced housing wealth, this exposure to rising 

interest rates could increase consumer credit risk in select local markets or for certain classes of 

borrowers. Finally, commercial real estate (CRE) loans, which have thus far performed well despite high 

vacancy rates and otherwise weak market conditions, may show increased credit risk as interest rates 

rise. 

Slow Business Spending and Hiring Set to Improve

The US economy has been expanding since the recession officially ended in November 2001; however, 

due to rapid labor productivity growth, the overall economy must grow at a faster pace than it had through 

mid-2003 in order to generate new jobs. This lack of job growth, the so-called “jobless recovery,” was the 

predominant risk facing the economy and insured institutions as of October 2003. Fortunately, following a 

7 percent jump in real GDP growth in third quarter 2003, economic growth is anticipated by most 

professional forecasters to run at an average annual rate of 4 percent through year-end 2004. This pace 

should be sufficient to finally generate the new jobs thus far missing from the economic expansion. 

Absent job growth in recent years, overall economic activity has been supported by proactive and 

aggressive fiscal and monetary stimulus. Fiscal stimulus has taken the form of direct government 

expenditures, including transfer payments made under the unemployment insurance program, as well as 

indirect stimulus through lower tax rates and child tax rebates in 2001 and 2003. Monetary policy 

stimulus, evident in a negative real federal funds rate in recent quarters, has also helped to support 

household cash flows by keeping down consumer and mortgage interest payments. Both of these factors 

have bolstered personal income growth (see Chart 1). Absent additional tax cuts, it is likely that the 

income-bolstering effects of fiscal stimulus will wane after the tax refund season in 2004. Also, with the 

eventual increase in overall interest rates, debt service burdens may also rise for some households. 

Sustained household income and spending growth will depend on the economy’s ability to generate solid 

job growth beyond mid-2004.
D

In addition to an imminent turn in the labor market, business investment also appears poised for stronger 

growth through 2004. Spending on technology gear and software, accounting for roughly half of non-real 

estate business investment, has been growing since mid-2002. Orders for non-technology manufactured 

goods have generally been improving since mid-year 2003. Further, the initial estimate of third quarter 

GDP showed that real non-technology business investment increased in all three major categories—

transportation, industrial, and other—even as real technology investment posted its seventh consecutive 

quarterly advance.

U.S. Reliance on Foreign Capital Could Push Interest Rates Higher

The two business cycle risks that have hampered the economy since recession’s end, the jobless 

recovery and lackluster business investment, appear set to finally fade away. This leaves one primary 

economic risk for 2004—the threat of higher interest rates. Interest rates could move higher next year due 

to several factors which might cut into demand for US Treasury debt. Chief among these are concerns 

that foreign investors may reduce their demand for US financial assets. This could arise either from 

improving domestic investment opportunities in those nations, which would siphon off some demand from 

US alternatives, or because of a reduced need to recycle US dollars attained through massive currency 

interventions. In addition, as the need to fund a growing federal budget gap results in greater issuance of 

US Treasury debt, interest rates may also move higher. 

As of this writing, signs of renewed growth were beginning to solidify in Japan, while the major European 

economies also were showing preliminary indications of stronger economic growth for 2004. Renewed 

growth abroad may encourage foreign investors to place more of their money in-country, reducing 

marginal demand for US government securities and other financial assets. That said, one offset will be 

continued growth in US imports. As the US economy begins to show stronger growth, import demand is 

likely to increase even further. As a result, exporters to the US are likely to continue to recycle significant 

dollar amounts earned through trade into US Treasury debt and other financial assets.

Given recent pressure on China and Japan to cease their currency intervention activities, these nations 
may reduce their net purchases of US Treasury debt, pushing up interest rates at the margin. Japan has 

sold yen and bought dollar denominated assets, such as US Treasuries, in order to weaken the yen and 

keep their exports competitive. From January through July this year alone, Japan sold about 9.03 trillion 

yen ($80.5 billion) and purchased US Treasuries. Japan is the largest foreign holder of US treasury notes 

and bonds, with $444 billion out of the $1.39 trillion held abroad as of July 2003. The total amount of 

treasury securities outstanding is about $3.5 trillion, so foreign holdings account for about 40 percent of 

all Treasury debt outstanding.

China is also a large purchaser of US treasuries, as it recycles its current account surplus with the U.S. 

and also maintains a currency exchange rate peg of 8.3 yuan per dollar. China needs large dollar 

reserves in order to maintain the yuan’s dollar peg against speculative attacks. According to the US 

Treasury, China is the third largest owner of U.S. treasury bonds, and these holdings surged 23 percent 

to $126 billion through the fall of 2003. About one third of China’s $365 billion of foreign exchange 

reserves are denominated in dollars (see Chart 2).

D

Government Will Compete With Private Borrowers in Credit Markets

The widening federal government deficit, and the increased demand for funding it entails, raises concerns 

about crowding out of private investment. As the overall demand for credit rises, upward pressure may be 

applied to interest rates. Although increases in expected deficits will likely push long term interest rates 

higher, the immediacy of the need for fiscal stimulus to support economic growth in the past two years 

has outweighed this concern in the minds of many policymakers and economists.

The Congressional Budget Office forecasts the budget deficit will widen to $500 billion in fiscal year 2004, 

after closing the 2003 fiscal year at $374 billion, or 3.5 percent of GDP—a ten year high. Although this 

was far from the 6 percent of GDP peak reached in 1983, the market may expect that the vast supply of 

Treasury securities needed to fund the US deficit going forward will necessitate higher yields. It is clear 

that there is a relationship between larger budget deficits and higher long-term interest rates. What is not 

clear is how much of the full impact of future expected deficits is reflected in long-term interest rates at the 
moment. It seems possible given the present accommodative monetary policy and weak global demand 

for capital, the full impact of the larger budget deficits are not yet reflected in long-term interest rates. As a 

synchronized global recovery takes hold and G-3 government deficits start to crowd out private sector 

investment, long-term interest rates may rise.

Exposure to Rising Interest Rates Has Grown

The exposure of FDIC-insured institutions to highly interest-sensitive assets is large and growing. As of 

June 30, fully one-third of industry assets were mortgage loans or mortgage-backed securities (see Chart 

3). An additional 8 percent of industry assets were other fixed-income securities. Holdings of mortgagerelated assets have grown rapidly at FDIC-insured institutions—making up 75 percent of industry loan 

growth in the first half of 2003—while commercial loans outstanding had declined for 10 consecutive 

quarters through June. According to Loan Performance Corporation, more than three-quarters of currently 

outstanding single-family mortgage debt was underwritten between early 2001 and mid-2003.

D

Mortgage-related assets and income streams are highly sensitive to movements in interest rates. Since 

2000, successive declines in interest rates have led to market value gains in securities and fixed-rate loan 

portfolios as well as recurring waves of mortgage refinancing, which has boosted the fees earned from 

mortgage origination while lowering the market value of mortgage servicing portfolios—both important 

sources of fee income for the industry. 

On net, lower interest rates have been a boon for the earnings of mortgage lenders and the industry as a 

whole. However, the fact that interest rates in June had reached their lowest levels in 45 years is 

characteristic of a unique—and potentially very challenging—interest rate cycle.

Even as lower rates and mortgage refinancing have been boosting the overall earnings of mortgage 

lenders, the low absolute level of short-term rates has made it difficult for many institutions to pass 

interest rate reductions along to their depositors, thereby squeezing their net interest margins (NIMS). In 

fact, the pervasiveness of declining NIMs is a persistent weakness in otherwise strong industry operating 

results.

The fact that millions of homeowners have refinanced mortgages at the lowest fixed rates in more than a 
generation will result in dramatically lower refinancing activity as interest rates rise. The significant 

increase in long-term Treasury yields that has taken place since mid-June of this year has already sharply 

slowed the rate of applications for mortgage refinancing. As a result, the effective maturity of mortgage 

portfolios has extended, amplifying price sensitivity to rising rates.

For example, the more than one percentage point increase in 10-year Treasury that occurred between 

early June and late August turned more than $14 billion in unrealized gains to $2.5 billion in unrealized 

losses in large bank available-for-sale securities portfolios. Lower originations can be expected to reduce 

the high levels of fee income mortgage lenders have earned in recent years. Moreover, the volume of 

low-yielding mortgage-related assets in the banking industry will weigh on earnings, either through NIM 

pressure or losses on sale of assets, as interest rates rise.

Highly Leveraged Households Pose Mortgage, Consumer Credit Risks

Persistently low interest rates prompted households to add consumer debt, rather than de-leverage 

during the last recession and subsequent “jobless recovery.” Because household sector debt growth 

outpaced disposable personal income increases, aggregate debt service burdens remain near historic 

highs. Despite elevated consumer leverage, mortgage and consumer loan delinquencies among insured 

institutions remain relatively low, thanks in part to low interest rates; however, to the extent households 

are exposed to variable rate debt, the magnitude and speed of future interest rate increases could 

influence consumer and mortgage loan performance prospectively.

Household cash flows may be squeezed by rising interest rates, in particular among consumers that rely 

on variable rate loans such as credit cards, home equity lines of credit, or adjustable-rate closed-end 

mortgages (ARMs). If any of these households also have taken on a significant amount of debt, such that 

a large portion of their monthly cash flows are already committed to debt service at current interest rates, 

this risk could be amplified. For instance, subprime mortgages are more often variable rate than prime 

loans, and subprime borrowers typically have less available resources to weather cash flow shocks. In 

addition, lender surveys by the Federal Housing Finance Board suggest that ARMs are more popular in 

the nation’s pricier housing markets such as San Francisco, San Diego, Los Angeles, New York, Boston, 

Seattle, and Denver (see Chart 4). Home equity lines of credit, which have increased dramatically in 

popularity, are also typically variable rate. Thus, rising interest rates could affect household debt service

requirements among subprime borrowers and homeowners in certain markets disproportionately.
D

Although low interest rates have boosted home purchase and refinancing activity and buoyed home 

prices, future interest rate increases could exert downward pressure on home purchase demand and thus 

home price appreciation rates in some markets. Importantly, the majority of outstanding mortgage debt 

was underwritten using recent collateral values, so declines from current highs could elevate mortgage 

default activity and losses among some mortgage lenders. Home prices in less-affordable housing 

markets could be particularly vulnerable, since median family incomes in these areas are already 

straining to finance median priced homes (see Chart 5). There is, of course, a theoretical limit in how 

long, and by how much, house price growth can diverge from income growth. The important question for 

financial stability is whether any correction that occurs is gradual or abrupt, localized or geographically 

widespread. While a nationwide housing bubble appears unlikely, many analysts concede that some 

markets may be prone to slower home price appreciation or home value declines in a rising interest rate 

environment given surrounding economic conditions, demographic shifts, or affordability constraints. 

Lenders specializing in highly-leveraged mortgages could also be affected disproportionately because of 

a weaker borrower equity position at origination. Historically, mortgages with higher loan-to-value ratios 

have been associated with higher default rates. 
D

The effects of higher interest rates on homeowner cash flows and collateral values could pose the 

greatest risk to insured institutions with elevated mortgage loan exposures. Although the popularity of 

ARMs combined with low and deteriorating affordability within many markets in the West could be cause 

for concern, insured community institutions based in many of these markets do not hold high, direct 

exposures to single family mortgages or consumer loans.1 In addition, past-due mortgage and consumer 

loan ratios among lenders in most Western states were low as of mid-2003. In contrast, median 

exposures to residential mortgages, consumer loans, and mortgage-backed securities tend to be higher 

among insured institutions in the eastern United States, particularly the Northeast (see Chart 6).
D

Mortgage underwriting developments over the past decade could also influence mortgage credit quality 

prospectively. For instance, most “conforming” mortgages are sold in the secondary market; thus, 

mortgages retained in bank loan portfolios may be weighted towards junior lien positions, jumbo 

mortgages, or credits to less creditworthy borrowers. Some underwriters have featured progressively less 

reliance on borrower equity, as evidenced by the rapid rise in “piggyback” financing arrangements, where 

portions of the traditional 20 percent downpayment are borrowed in the form of a home equity loan (e.g., 

“80-10-10” loans). Similarly, home equity lending programs featuring loan-to-value ratios in excess of 100 

percent have become more common. These lending developments have opened the door to 

homeownership for many, but they may also pose increased credit risks to mortgage lenders. 

Construction and Commercial Real Estate Lenders Again a Concern

Commercial real estate lending was at the heart of the banking problems of the 1980s and early 1990s. 

Aggressive underwriting and rampant overbuilding led to billions in losses to the industry and the deposit 

insurance funds. Construction activity and CRE lending fell off for a number of years in the 1990s before 

a late-decade resurgence that was centered in certain fast-growing metro areas in the FDIC’s Atlanta and 

San Francisco regions. Community banks in those metro areas built up significant concentrations in 

construction and CRE lending during the late 1990s as the housing markets boomed, commercial rents 

rose, and vacancy rates fell to historically low levels. Currently, some 778 FDIC-insured institutions show 

concentrations of construction and commercial real estate loans exceeding 500 percent of Tier 1 capital. 

In measuring these concentrations, however, it is important to emphasize that much of the exposure 

consists of residential construction loans, where credit risk is historically lower and fundamentals to date 

have been strong. A recent FDIC supervisory initiative showed that one-half of construction and 

development loan exposures at institutions reviewed in its Atlanta Region were residential projects. 

Residential Construction Lending

Higher interest rates, lackluster employment growth, and slowing rates of home price appreciation may 

become particularly challenging for certain community banks. Many community banks have found a niche 
as residential real estate acquisition and development lenders. This lending activity is exposed to the 

fortunes of the residential housing and mortgage markets, which could suffer from higher mortgage rates 

and stagnant or falling home values in certain markets. While reports are that many residential builders 

are strong enough to weather potential slowing in housing demand, institutions that have pursued loan 

growth by lending to relatively thinly capitalized builders may find these builders struggling to make debt 

service payments. Some young institutions in formally fast growing metro areas have reportedly relaxed 

lending standards in their residential construction and development lending programs to meet growth and 

market share targets. 

Commercial Real Estate Lending

Since late 2000 market fundamentals in commercial offices, industrial facilities, and lodging properties 

have fallen off considerably. Office vacancy rates doubled between mid-2000 and mid-2003, to 17 

percent of available space (see Chart 7). As rents negotiated in long-term lease continue to dilute current 

trends, in-place rents have fallen only gradually. More starkly, asking rents have declined by as much as 

50 percent in some markets during that time, suggesting further downward pressure for property cash 

flows until job growth picks up significantly. 

D

Despite these weak fundamentals, CRE loan performance at FDIC-insured institutions remains strong by 

historical standards. As of June 30, nonperforming CRE loans measured only 0.89 percent of outstanding 

balances. Several trends may have helped insulate banks’ CRE portfolios from the effects of the 

deteriorating market fundamentals in this cycle, including: low interest rates; more stringent CRE lending 

standards; the availability of alternate, publicly-held funding sources such as REITs; and, the relative 

attractiveness of real estate as an investment class. 

Lower interest rates have reduced debt service burdens and allowed property owners to meet loan 

payments despite reduced occupancy and rental rates. Regulatory reforms enacted after the last real 

estate down cycle significantly enhanced supervisory guidelines for underwriting, real estate appraisal, 

and other risk management practices. Publicly-available funding sources have improved market 
transparency and the current popularity of real estate investments has sustained property values despite 

weaker fundamentals.

At the same time, analysts are warning that the disconnect between the weak fundamentals of CRE 

markets and the strong performance of CRE loans will not persist indefinitely. In this regard, the single 

factor that could do the most harm to CRE loan performance would be rising interest rates. 

Because most CRE loans are financed at variable interest rates, higher interest rates could quickly push 

up debt service costs and strain push borrowers into a money-losing situation. Rising interest rates could 

also raise the rates of return demanded by property investors. Absent a concurrent turnaround in net 

operating incomes, real estate values and thus collateral prices could come under pressure.

History shows that commercial real estate lending is an area where credit losses can accumulate quickly. 

In the face of high loan concentrations, weak market fundamentals, and borrowers hanging on by virtue of 

low interest rates, the potential for higher losses represents a clear and significant risk.

Emerging Risks in Perspective

The risks discussed above should caution FDIC-insured institutions to guard against complacency in 

managing their own risks. However, the industry in the aggregate is well-positioned to withstand the 

present risks. Net income for the banking and thrift industries set another record of nearly $60 billion in 

the first half of 2003. This followed a banner year in 2002 when industry earnings topped $100 billion for 

the first time. Moreover, the industry appears poised to report another record quarter for the period ended 

September 30, 2003. Eleven consecutive years of returns exceeding one percent of industry assets have 

contributed to an industry aggregate capital ratio that is near record-high levels. Finally, the percent of 

unprofitable institutions is near record lows. Overall concern should be moderated by these performance 

statistics.

1 For purposes of this analysis, insured community institutions include insured institutions holding less than $5 billion in total assets that are 

not specialty lenders or industrial loan companies.

About FYI

FYI is an electronic bulletin summarizing current information about the trends that are driving change in 

the banking industry, plus links to the wide array of other FDIC publications and data tools. 

Disclaimer 

The views expressed in FYI are those of the authors and do not necessarily reflect official positions of the 

Federal Deposit Insurance Corporation. Some of the information used in the preparation of this 

publication was obtained from publicly available sources that are considered reliable. However, the use of 

this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance 

Corporation.

Last Updated 11/4/2003
Chart 1

Tax Cuts Are Boosting Income Growth 

For Now, But Sustained Job Gains Are 

Needed To Support Personal Income Over 

The Long Haul

Date

Personal Income 

Percent change, 

year-over-year

Disposable 

(after-tax)

1999 6.08 5.62

1999 5.51 4.92

1999 5.01 4.39

1999 4.78 4.20

1999 4.55 3.94

1999 4.47 3.85

1999 4.25 3.55

1999 4.30 3.91

1999 4.15 3.47

1999 4.63 3.99

1999 4.93 4.37

1999 5.67 5.14

2000 6.71 5.91

2000 7.22 6.50

2000 7.84 7.11

2000 7.94 7.22

2000 8.14 7.63

2000 8.32 7.81

2000 8.73 8.35

2000 8.52 7.86

2000 8.88 8.53

2000 8.34 7.99

2000 7.76 7.42

2000 7.13 6.86

2001 6.07 5.82

2001 5.45 5.25

2001 4.81 4.57

2001 4.53 4.36

2001 3.82 3.58

2001 3.37 3.21

2001 3.05 4.17

2001 2.54 5.69

2001 2.13 4.16

2001 1.50 1.76
2001 1.33 1.74

2001 1.52 1.92

2002 1.42 4.38

2002 1.75 4.86

2002 1.87 5.07

2002 2.15 5.46

2002 2.73 6.15

2002 3.35 6.87

2002 2.58 4.98

2002 2.96 3.50

2002 3.17 4.92

2002 3.43 7.07

2002 3.69 7.27

2002 3.63 7.23

2003 3.33 4.77

2003 3.10 4.36

2003 3.01 4.17

2003 2.87 3.86

2003 2.81 3.70

2003 2.47 3.27

2003 3.16 5.09

2003 3.13 5.67

2003 3.36 4.68

Source: BEA

Chart 2

Foreign Holdings of U.S. Treasury 

Securities

Date China Japan Others

199609 40.6 246.3 -286.9

199610 43.8 254.0 -297.8

199611 46.1 256.5 -302.6

199612 47.2 263.3 -310.5

199701 48.1 266.2 -314.3

199702 52.3 273.0 -325.3

199703 53.2 274.4 -327.6

199704 52.6 281.8 -334.4

199705 51.5 287.0 -338.5

199706 41.5 293.7 -335.2

199707 40.4 298.8 -339.2
199708 43.7 297.9 -341.6

199709 45.1 294.6 -339.7

199710 46.2 300.2 -346.4

199711 46.4 295.2 -341.6

199712 47.9 277.6 -325.5

199801 49.6 270.0 -319.6

199802 48.3 273.7 -322.0

199803 48.1 274.1 -322.2

199804 47.3 264.2 -311.5

199805 46.4 266.7 -313.1

199806 45.2 264.1 -309.3

199807 44.3 264.4 -308.7

199808 43.2 264.5 -307.7

199809 43.6 264.5 -308.1

199810 45.2 265.1 -310.3

199811 47.1 272.7 -319.8

199812 46.4 276.1 -322.5

199901 47.3 278.7 -326.0

199902 47.4 280.0 -327.4

199903 46.6 280.9 -327.5

199904 45.0 284.9 -329.9

199905 47.2 286.5 -333.7

199906 49.4 299.5 -348.9

199907 50.0 302.9 -352.9

199908 50.1 305.4 -355.5

199909 51.0 316.1 -367.1

199910 52.1 318.4 -370.5

199911 50.1 313.9 -364.0

199912 51.8 320.0 -371.8

200001 57.3 323.1 -380.4

200002 60.1 321.2 -381.3

200003 71.4 307.6 -379.0

200004 71.7 322.4 -394.1

200005 72.5 319.4 -391.9

200006 67.5 318.8 -386.3

200007 66.4 319.6 -386.0

200008 62.6 317.8 -380.4

200009 62.1 317.3 -379.4

200010 59.5 317.7 -377.2

200011 58.9 321.7 -380.6
200012 60.3 317.7 -378.0

200101 61.5 312.3 -373.8

200102 63.7 312.5 -376.2

200103 69.8 307.1 -376.9

200104 69.2 305.9 -375.1

200105 69.2 306.7 -375.9

200106 72.7 300.8 -373.5

200107 74.2 295.3 -369.5

200108 73.4 293.1 -366.5

200109 72.0 292.9 -364.9

200110 72.3 314.5 -386.8

200111 77.9 315.4 -393.3

200112 78.6 317.9 -396.5

200201 77.5 310.6 -388.1

200202 76.5 311.9 -388.4

200203 84.5 312.6 -397.1

200204 82.4 314.6 -397.0

200205 81.3 317.8 -399.1

200206 81.0 335.7 -416.7

200207 81.4 348.2 -429.6

200208 86.8 350.9 -437.7

200209 89.2 360.5 -449.7

200210 91.0 359.5 -450.5

200211 96.9 361.5 -458.4

200212 102.9 364.7 -467.6

200301 105.2 371.8 -477.0

200302 106.2 377.6 -483.8

200303 117.7 386.6 -504.3

200304 119.4 389.2 -508.6

200305 121.7 429.7 -551.4

200306 122.5 441.6 -564.1

200307 126.1 443.8 -569.9

Source: U.S. Treasury

Chart 3

One Third Of Commercial Bank and Thrift Assets Were 

Mortgage-Related As Of June 30, 2003 

Asset Category Percent of Total 

Assets

Mortgage-backed securities and 1 to 4 33%
family mortgage loans 

Commercial loans 22%

Consumer loans 9%

All other securities 8%

All other loans 7% 

All other assets 22% 

Source: Bank and Thrift Reports 

Chart 4

Home Purchasers In Higher-Priced Markets Opt For Adjustable-Rate 

Mortgages More Frequently 

City

Average Purchase 

Price (1999-2002, 

$000s)

Average Annual Share of Home 

Purchase Mortgages With 

Adjustable Rates (1999-2002, 

%)

Atlanta 208 16.75

Boston 261 25.25

Chicago 224 30.50

Cleveland 171 11.50

Columbus 185 16.75

Dallas 181 14.00

Denver 258 27.50

Detroit 207 21.00

Greensboro 157 14.50

Honolulu 270 18.75

Houston 165 7.75

Indianapolis 172 18.25

Kansas City 167 22.25

Los Angeles 292 35.25

Louisville 158 11.25

Miami 184 21.50

Milwaukee 176 16.75

Minneapolis 214 14.50

New York 289 19.25

Philadelphia 206 11.75

Phoenix 189 20.00

Pittsburgh 148 10.00

Portland 208 23.00

Rochester 149 4.25

Salt Lake 196 24.00
City

San Diego 323 37.00

San 

Francisco 417 56.25

Seattle 261 27.25

St. Louis 158 16.50

Tampa 155 13.25

Washington, 

DC 270 15.50

Nation 207 18.50

Note: Data include mortgages originated for home purchases only; 

excludes refinancings.

Source: Federal Housing Finance Board 

Chart 5

Affordability Has Continued To Weaken In Many California and 

Northeast Markets

Location 1997Q2 2000Q2 2003Q2

Salinas CA 71.58 48.60 50.42

Santa Barbara CA 71.88 65.48 61.86

Santa Cruz CA 84.47 72.00 63.49

New York NY 90.37 79.00 65.42

San Francisco CA 87.22 69.36 66.53

San Diego CA 98.70 76.50 66.76

Los Angeles CA 96.30 80.71 67.37

Santa Rosa CA 93.51 75.92 67.56

Orange County CA 100.56 76.81 68.02

San Jose CA 88.84 67.35 72.96

Redding CA 101.64 85.04 73.48

Barnstable MA 95.39 70.75 74.37

San Luis Obispo CA 94.36 85.19 81.55

Vallejo CA 123.96 90.57 82.01

Boston MA 110.51 76.48 82.94

Chico CA 108.44 90.61 84.74

Nation 143.55 132.51 143.24
Note: For each market, the index shows the share of a median 

priced home's mortgage that is affordable to households earning 

a median income. A lower number indicates less affordability.

Source: Economy.com

Chart 6

Insured Institution Exposures To Housing and Consumer Credit 

Tend

To Be Highest East Of the Mississippi

State 

1-4 Family and Consumer 

Loans / Total Assets 

(Median %)

Mortgage-Backed 

Securities / Total Assets 

(Median %)

NH 41.37 4.02

WV 35.36 4.42

FL 20.78 5.72

NV 4.10 2.00

VT 43.24 8.46

OH 39.07 3.26

KY 34.45 2.75

HI 33.73 11.85

IN 36.93 4.43

MO 27.07 1.16

CA 7.29 3.92

MA 39.38 6.35

RI 41.18 0.38

DE 27.10 6.46

NC 30.42 3.53

CT 39.31 10.48
WA 14.45 0.83

ME 41.25 4.54

TN 31.15 4.21

VA 30.84 2.13

AZ 10.44 0.15

WY 17.68 3.57

CO 16.10 0.67

KS 18.89 2.40

OK 21.30 4.59

UT 13.15 0.48

PA 33.34 11.44

OR 11.27 0.84

MD 34.76 5.04

NY 26.98 9.37

NJ 27.00 13.23

DC 10.81 3.93

SC 28.32 4.34

AL 25.68 6.59

MT 16.76 2.70

AK 13.21 1.81

MI 31.77 0.60

TX 18.53 4.59

MS 27.71 6.24

GA 23.63 4.56

ID 18.94 4.87

IL 23.32 4.03

WI 26.97 2.42

LA 26.91 6.23

IA 19.16 1.31

NM 19.02 7.78

AR 25.21 2.88

NE 11.97 0.14

MN 20.33 3.08

PR 19.83 14.66

ND 10.59 7.24

SD 10.27 2.54

US 23.81 3.67

Note: Includes insured institutions holding less than $5 billion in 

total assets that are not specialty lenders.

Source: Economy.com 
Chart 7

U.S. Office Vacancies Growth Slowed

Negative Absorption Continued Through First Half 

000,000 s.f.

Date Completions Net Absorption Vacancy Rate

12/31/90 82 52.70 18.72%

12/31/91 53 34.90 19.04%

12/31/92 32 37.30 18.68%

12/31/93 7 54.10 16.91%

12/31/94 6 48.50 15.30%

12/31/95 8 43.10 13.92%

12/31/96 16 61.60 12.20%

12/31/97 28 86.90 9.93%

12/31/98 56 77.00 8.97%

12/31/99 101 72.50 9.61%

12/31/00 83 103.10 8.65%

12/31/01 83 -96.50 14.20%

12/31/02 61 -14.70 16.50%

12/31/03 18 -1.10 16.90%

Source: Torto Wheaton Research 2003 results are for second quarter 2003.