Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION	 FIRST QUARTER 2002 

In Focus This Quarter 

◆ Housing Market Has Held Up Well in This Recession, but Some Issues FDIC Raise Concern—Recent trends in mortgage underwriting are of particular inter- National Edition	 est, 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 

Division of	 2001, despite slowing local economies, are at higher risk. Weakening home 

Insurance prices could hurt loan quality in selected markets. The San Francisco Bay area 

stands out as a place to watch in this regard. See page 3. 

San Francisco Kansas 

City 

Dallas 

Memphis 

Atlanta 

New 

York 

Boston 

Chicago 

Regional Perspectives 

◆ Atlanta—The current downturn may adversely affect 

the Region’s insured institutions that have relied on rapid 

economic growth, such as those experiencing their first 

recession or institutions with concentrations in traditionally 

higher risk loans. See page 14. 

◆ Boston—Interest rate risk appears to be increasing, 

especially for the Region’s smaller savings institutions. Managing this risk will involve a trade-off between short-term 

profits and long-term earnings stability. See page 15. 

◆ Chicago—Despite years of economic restructuring, the 

recession is still felt keenly in the Region. Rapidly falling 

interest rates improved margins, but may challenge asset/ 

liability management strategies. See page 16. 

◆ Dallas—Slowing employment growth and overbuilding 

may contribute to weakening of housing price growth in the 

Denver and Austin MSAs. Leaner collateral positions could 

heighten the level of risk in mortgage lending. See page 17. 

By Scott Hughes, Regional Economist 

Judy Plock, Senior Financial Analyst 

Joan Schneider, Regional Economist 

Norm Williams, Regional Economist 

◆ Kansas City—Layoffs in the aircraft manufacturing 

industry since September 11, 2001, have hurt the Wichita 

economy. As the Region’s commercial real estate sector has 

weakened, insured institutions have increased CRE lending 

exposures. See page 18. 

◆ Memphis—Credit quality deterioration remains a 

major concern for many of the Region’s insured institutions. In addition, continued interest rate volatility could 

challenge interest rate risk management and pressure 

earnings performance. See page 19. 

◆ New York—The aftermath of September 11, 2001, further weakened the Region’s economic outlook. Insured institutions appear better positioned to weather this economic 

downturn than the last recession; however, credit quality 

and interest rate risk challenges lie ahead. See page 20. 

◆ San Francisco—Declining demand for real estate could 

signal the potential for credit quality weakening among the 

Region’s construction lenders. See page 21. 

A Publication of the Division of Insurance 
The Regional Outlook is published quarterly by the Division of Insurance of the Federal Deposit 

Insurance Corporation as an information source on banking and economic issues for insured 

financial institutions and financial institution regulators. It is produced for the following eight 

geographic regions: 

Atlanta Region (AL, FL, GA, NC, SC, VA, WV)
 

Boston Region (CT, MA, ME, NH, RI, VT)
 

Chicago Region (IL, IN, MI, OH, WI)
 

Dallas Region (CO, NM, OK, TX)
 

Kansas City Region (IA, KS, MN, MO, ND, NE, SD)
 

Memphis Region (AR, KY, LA, MS, TN)
 

New York Region (DC, DE, MD, NJ, NY, PA, PR, VI)
 

San Francisco Region (AK, AS, AZ, CA, FM, GU, HI, ID, MT, NV, OR, UT, WA, WY)
 

The first and third quarter issues of the Regional Outlook feature in-depth coverage of the economy and the banking industry in each Region and consist of a national edition and eight regional editions. The second and fourth quarter issues are a single national edition that provides an overview 

of economic and banking risks and discusses how these risks relate to insured institutions in each 

FDIC Region. These issues tell the national story and, at the same time, alert the reader to specific 

trends and developments at the regional level. 

Single copy subscriptions of the Regional Outlook can be obtained by sending the subscription 

form found on the back cover to the FDIC Public Information Center. Contact the Public Information Center for current pricing on bulk orders. 

The Regional Outlook is available on-line by visiting the FDIC’s website at www.fdic.gov. For 

more information or to provide comments or suggestions about the National Edition of Regional 

Outlook, please call Lynn Nejezchleb at (202) 898-3898 or send an e-mail to lnejezchleb@fdic.gov. 

The views expressed in the Regional Outlook 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. 

Chairman Donald E. Powell 

Director, Division of Insurance Arthur J. Murton 

Executive Editor George E. French 

Writer/Editor Kim E. Lowry 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Richard A. Brown 

Ronald L. Spieker 

Publications Manager Teresa J. Franks 
In Focus This Quarter
 

Housing Market Has Held Up Well in This 


Recession, but Some Issues Raise Concern
 

Trends in housing markets are important performance 

drivers for many FDIC-insured institutions. The health of 

residential markets can affect the credit quality of residential mortgage loans, home equity loans, and loans to 

finance residential construction and is linked indirectly to 

the performance of other types of consumer and smallbusiness debt. Further, an estimated $2 trillion in mortgage debt, approximately one-third of the mortgage 

market, was underwritten during 2001, with 56 percent of 

this activity in refinancing transactions.1 This activity 

makes recent trends in underwriting of particular interest. 

An ancillary issue for many mortgage lenders, interest 

rate risk, is not addressed in this article.2 

The U.S. economy entered a recession in March 2001, 

and the question arises as to how consumer creditworthiness, housing values, and recent mortgage-lending 

practices will fare during this downturn. Developments 

contributing to increased credit risk include higher consumer debt burdens, looser mortgage loan underwriting 

standards, and the emergence of subprime mortgage 

lending as a significant line of business for some banks. 

Mitigating this risk has been the steady appreciation of 

home prices, which have shown signs of softening in 

some markets but not to the extent seen at a comparable 

stage in previous recessions. 

Home price weakness may be more pronounced in 2002 

as the effects of the recession take hold, but in the 

authors’ judgment, systemic weakness in home prices is 

unlikely, absent a deep and long recession. Adverse mortgage lending trends are not expected to threaten the capital or earnings of the vast majority of insured 

institutions. Nonconstruction residential mortgages, even 

during the most pronounced periods of stress in the 1980s 

and early 1990s, remained the best-performing loan 

class, especially for lenders specializing in residential 

real estate; and, historically, these mortgages have been 

1 Mortgage Market Forecast, www.mbaa.org/marketdata/forecasts/,
 

January 2002.
 

2 For a discussion of this issue, see “Regional Perspectives,” Boston
 

and Chicago Regions, Regional Outlook, First Quarter 2002.
 

one of the lowest credit-risk loan types for all manner of 

insured institutions.3 

That said, however, there are pockets of risk for 

insured institutions. There is evidence that borrowers 

with weak credit may be experiencing greater repayment difficulties, elevating the risks faced by subprime 

mortgage lenders. Further, a slump in residential real 

estate markets could be especially detrimental to 

insured institutions with significant exposures to 

housing construction because projects might not sell at 

projected asking prices or as quickly as anticipated. 

Finally, in specific markets where housing prices may 

have achieved unsustainable levels, some increase in 

housing-related credit quality problems can be expected, and in this regard, the San Francisco Bay area 

stands out as a place to watch. 

The Recession Thus Far Has Had 

a Minimal Impact on Mortgage 

Delinquencies at Insured Institutions 

Despite three quarters of recession, most housing indicators remained quite healthy this past year relative to 

trends seen in past recessions. For example, new and 

existing home sales both set records during the year, 

while new home construction failed to decline, an 

occurrence not seen in the past six recessions. Another indicator, year-over-year growth in existing home 

prices—as measured by either the Office of Federal 

Housing Enterprise Oversight (OFHEO) repeat sales 

price index or the National Association of Realtors 

(NAR) median single-family price statistic—showed 

deceleration but remained well above trends seen at 

similar points in past recessions. This behavior partly 

reflected the early robustness of household income in 

the face of recession and relatively low fixed mortgage 

rates during 2001, which helped to counter some of the 

3 See “Region’s Insured Institutions Exhibit Lower Risk Profile than 

the Nation’s, Appendix: Risk-Weighting Methodology,” Table A in 

Boston Region, Regional Outlook, First-Quarter 2000. 

Regional Outlook—National Edition 3 First Quarter 2002 
In Focus This Quarter
 

CHART 1 CHART 2 

Through September 2001, Mortgage-


Related Delinquencies Remained Modest
 

Although the Much Larger Market for 

Existing Homes Has Held Up, New Home 

Prices Are Under Pressure 

Percentage Change from

Prior Year 

Sources: Census (new), National Association of Realtors (Existing) 

Existing 

New 

–10 

–5 

0 

5 

10 

15 

20 

,

79 ,81 ,83 ,85 ,87 ,89 ,91 ,93 ,95 ,97 ,99 ,

01 

Percentage 

30+ Days Past Due 

0 

2 

4 

6 

8 

10 

12 

,

91 ,93 ,95 ,97 ,99 Sep ,

01 

0 

1 

2 

3 

4 

5 

6 

Percentage 

30+ Days Past Due 

95th Percentiles (R) 

mortgages equity lines 

75th Percentiles (L) 

NOTE: Sample consists of banks with at least $1 million in equity lines 

or mortgages that are also at least 5 percent of bank's Tier 1 capital. 

Source: Bank and Thrift Call Reports 

initial adverse effects of the recession on housing 

demand. 

One sign of potential weakness appeared late in 2001 

in the modest year-over-year decline in median prices 

of new single-family homes (see Chart 1). Because 

existing home sales outnumber new home sales roughly fivefold, price trends in the latter are generally not 

predictive of prices for the much larger existing home 

market.4 However, as discussed later in this article, 

adverse pricing trends in the new home segment do 

raise concerns for residential developers and insured 

institutions that finance residential construction. 

The steady increase in prices of existing homes depicted in Chart 1 masks considerable regional variation. 

As detailed later in this article, home price growth 

began to weaken in 2001 in a number of metropolitan 

statistical areas (MSAs). While there is no clear common denominator among the markets in which this 

occurred, a number of these markets had both extremely rapid home price growth in the recent past and significant slowdowns in employment growth or outright 

contractions in employment last year. 

Credit quality indicators for insured institutions’ mortgage loans have shown only preliminary signs of 

weakness thus far. Through the first nine months of 

2001, insured institutions showed negligible advances 

in median past-due ratios for mortgages and equity 

4 Existing home prices are also more reflective than new home prices 

of trends in broader economic indicators, such as aggregate per capita personal income. 

lines of credit, although continued strong mortgage 

origination activity in 2001 may have masked (in the 

aggregate) developing credit problems for more seasoned mortgage loans. For institutions that held at 

least $1 million in residential mortgages or home equity lines of credit and whose exposures comprised at 

least 5 percent of Tier 1 capital, some modest deterioration is evident in the worst-performing mortgages 

and home equity lines since 1999, as seen in Chart 2.5 

Even if this recession lingers, worsens, or both, residential mortgage lending (nonconstruction and development-related) likely poses only modest risk to most 

insured institutions’ earnings and capital, since it has 

held up better in prior recessions than other loan types. 

What Are the Risks Facing Housing 

Lenders in 2002 and Beyond? 

In an environment of significantly slower economic 

growth than prevailed during the 1990s, can the 

strength of housing prices and the relatively benign 

credit quality environment for housing lenders be 

expected to continue? The answer will depend on the 

interplay of economic conditions and lenders’ risk profiles. In the remainder of this article, we discuss the 

gradual increase in the risk profile for insured mortgage lenders that appears to have occurred during the 

5 It is interesting to examine the (adverse) tail of the credit quality distribution when looking at residential mortgage trends, as average and 

median past-due ratios move little and are typically very low—thus, 

only the highest 25th and 5th percentiles of past-due ratios are presented in Chart 2. 

Regional Outlook—National Edition 4 First Quarter 2002 
, UT

Miami– 

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Phoenix, AZ

, NV–AZ 

, MO–IL 

Tucson, AZ

Oklahoma City

, NY

, OK 

Kansas City

Tulsa, OK

, MO–KS

, NC–SC 

mingham, AL

, TN-AR–MS

Honolulu, HI

, SC 

Entire Nation

, FL

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 Lauderdale

Alban

Buff

 Louis

Green

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Salt Lak

Memphis

Las V

Char

St.

Bir

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In Focus This Quarter
 

1990s, as well as some cyclical risks to their performance that may exist as the recession plays out. 

Evolving Lending Practices Have Increased 

the Risk Profile for Mortgage Lenders 

Although history suggests that residential mortgage 

defaults will be relatively low even in a recession, 

changes in the mortgage market since the 1990–1991 

recession could affect mortgage performance during the 

present downturn. Many underwriting changes over the 

past decade have been driven in part by the growing 

importance of the secondary market for mortgage debt, 

and of Fannie Mae and Freddie Mac in particular. In 

1980, federal and related agencies had direct or indirect 

interests in approximately 17 percent of all mortgage 

debt.6 By 2000, their share of the mortgage market had 

increased to roughly 41 percent. Insured bank and thrift 

mortgage exposures grew over the same period, but, as 

a share of direct mortgage debt, bank and thrift mortgage holdings decreased from 59 to 35 percent. These 

trends notwithstanding, insured institutions still provide 

substantial funding, directly or indirectly, to the housing 

market: as of September 30, 2001, 1 to 4 family mortgage loans and mortgage-backed securities held by 

insured institutions aggregated $2.3 trillion, up 37 percent from five years earlier. 

Although an active secondary mortgage market has 

broadened homeownership, improved mortgage loan liquidity, and allowed insured institutions to allay credit 

risk, it has also heightened market competition and transformed the lending process. In presecondary market 

CHART 3 

1993 2000 

days, lenders largely had to retain originated mortgages 

in their own portfolios. Consequently, only lenders with 

ready funding sources (such as banks, thrifts, and insurance and finance companies) were able to compete in the 

mortgage markets. The advent of the secondary market 

enlarged the pool of available funding and permitted both 

insured institutions and other originators to transfer their 

mortgage business readily into entities such as mortgage 

pools and trusts. Consequently, many new players, 

including on-line and brick-and-mortar mortgage brokers, have entered the mortgage origination market. 

The resulting robust mortgage loan competition, combined with Internet-based consumer research tools, has 

led to considerable commodification of the mortgage 

market. Rather than competing on the basis of traditional 

relationships, lenders’ market shares are increasingly 

driven by price. For smaller savings institutions that focus 

heavily on residential mortgage underwriting, this issue 

has likely elevated business risk. Heightened competition 

has caused some loosening of mortgage underwriting 

standards and pushed lenders to use technology to expedite and streamline the underwriting process. Consequently, credit-scoring mechanisms and automated 

valuation techniques currently in place have not been 

tested through a full credit cycle. Because pricing competition has pressured margins, some mortgage lenders 

have pursued subprime or high loan-to-value (HLTV) 

mortgages. The ability of insured institutions to mitigate 

subprime losses through an economic downturn is untested to a large extent as well—finance companies dominated the high-risk mortgage market in past recessions. 

High Loan-to-Purchase Price Ratios Are Increasingly Common in Some Metro Areas 

Percentage of Mortgages with Loan-toPurchase Price Ratios Exceeding 90 Percent 

60 

40 

20 

0 

Source: Federal Housing Finance Board 

6 These interests include residential, commercial, and farm real estate debts held directly by, or held in mortgage pools or trusts issued by, federal 

and related agencies. Source: Table 1186, Statistical Abstract of the United States: 2001, page 733. 

Regional Outlook—National Edition 5 First Quarter 2002 
In Focus This Quarter
 

In general, mortgage underwriting standards have loosened industrywide over the past decade. For instance, 

lenders have increasingly accepted higher loan-topurchase price (LTPP) ratios for purchase money mortgages.7 According to the Federal Housing Finance 

Board, LTPP ratios are high and have risen in several 

metropolitan areas over the past seven years (see Chart 3). 

Between 1993 and 2000, the Honolulu, Tulsa, and Tucson markets exhibited the largest increases in mortgages 

with LTPP ratios exceeding 90 percent. 

Although lenders often mitigate the risk of loss associated with low downpayments by requiring private mortgage 

insurance (PMI), recently the mortgage industry has 

allowed borrowers to avoid purchasing PMI. In particular, 

“piggyback” financing has made homeownership 

increasingly possible for households that cannot afford 

the traditional 20 percent down payment or do not wish to 

pay for PMI. With piggyback financing, the borrower 

often arranges a conforming 80 percent LTPP first mortgage and finances a portion of the remaining 20 percent 

with a concurrent second mortgage on the property (e.g., 

“80-10-10”). This type of transaction has become popular 

because interest paid on the (albeit more expensive) second mortgage is tax-deductible, whereas PMI premiums 

are not. Thus, piggyback financing is probably most 

attractive to individuals in higher-cost/tax areas or higher 

tax brackets, such as those in the Northeast and California. This trend effectively shifts the first loss position 

on all low down payment loans to the lender that 

retains the junior position. These institutions are, of 

course, compensated for some of this risk with the 

higher interest rates charged on the piggyback portion 

of these mortgages. 

Competitive factors have prompted the industry to 

enhance underwriting automation. As part of the push, 

credit scoring has become a routine part of the credit 

analysis process, and, increasingly, lenders are using 

automated valuation models (AVMs) to determine collateral coverage. However, credit scoring and collateral valuation models have been in popular use only 

since the 1990–1991 recession; consequently, their 

predictive ability in a downturn is uncertain. Although 

some have touted AVMs as the answer to appraisal 

fraud, the ability of statistical models to simulate the 

qualitative judgments considered critical to traditional 

appraisals is unknown. Paper appraisals reportedly 

7 Purchase money mortgages are loans extended solely for the initial 

purchase of a home. Statistics on loan-to-value ratios for supplemental home equity loans/lines (e.g., piggyback or “80-10-10” financing), as well as refinanced mortgages, are not readily available. 

continue to dominate the industry; however, recently, 

the two largest government-sponsored enterprises have 

begun accepting AVMs in lieu of standard appraisals 

for loans under $275,000.8 For lenders that specialize 

in HLTV mortgages, there is less room for error with 

AVMs. 

Cyclical Weakness Is Already Apparent 

in Subprime Mortgage Lending 

Historically, certain insured institutions have made 

mortgage loans with narrow collateral margins or to 

borrowers with limited or blemished credit histories. 

However, significant entry by FDIC-insured institutions into mortgage lending to borrowers with weak or 

marginal credit, as a targeted line of business, generally has occurred only since the early 1990s. These 

“subprime” mortgages are neither defined nor reported on Bank Call Reports. As a result, gauging the 

extent of bank involvement in subprime lending at any 

point in time is difficult. However, the FDIC estimates 

that fewer than 1 percent of all insured institutions 

have significant subprime residential mortgage exposures. Nevertheless, according to some measures, subprime mortgages as a share of total mortgage 

originations peaked at 13 percent in early 2000, before 

moderating somewhat during the first three quarters of 

last year.9 Thus, a much larger number of institutions 

probably have some limited involvement in subprime 

mortgage lending. A survey by the Minneapolis Federal Reserve Bank found that 29 percent of banks in 

the Minneapolis District offered loans to low-credit 

quality consumer borrowers in 1999.10 

Subprime mortgage loan performance appears to have 

deteriorated notably during 2001. One source of support for this observation comes from delinquency 

trends on Federal Housing Agency (FHA)-insured 

mortgages, which are often granted to first-time homebuyers with troubled credit histories and borrowers 

with low down payments. The Mortgage Bankers 

Association reports that while the national delinquency rate on conventional mortgages rose 58 basis points 

in the year ending third-quarter 2001, the delinquency 

rate on FHA mortgages shot up by 234 basis points, to 

11.4 percent (see Chart 4). This growing gap between 

8 “Automated Appraisals Require Caution by Lenders,” American 

Banker, October 10, 2001. 9 Based on dollar volumes, data from Inside Mortgage Finance Publications, Bethesda, MD. 

10 Ron Feldman and Jason Schmidt, “Why All Concerns About Subprime Lending Are Not Created Equal,” Fedgazette, Minneapolis 

Federal Reserve, July 1999. 

Regional Outlook—National Edition 6 First Quarter 2002 
In Focus This Quarter
 

CHART 4 

Recent Mortgage Delinquencies for HigherRisk Loans Reached All-Time Highs 

Percentage of Mortgages

30+ Days Past Due

FHA 

Conventional 

,

79 ,81 ,83 ,85 ,87 ,89 ,91 ,93 ,95 ,97 ,99 ,01 

0 

2 

4 

6 

8 

10 

12 

Source: Mortgage Bankers Association 

delinquency rates on conventional and governmentinsured mortgages suggests that marginal and subprime borrowers are facing growing repayment 

difficulties. 

A database of more than 6.5 million subprime loans 

tracked by Loan Performance Corporation (formerly 

Mortgage Information Corporation) reported similar 

trends. The nationwide third quarter 2001 ratio of seriously delinquent subprime mortgages was 7.3 percent, up 

from 5.5 percent one year earlier.11 Moreover, subprime 

delinquencies significantly exceeded those found among 

prime mortgages, as just under 0.5 percent of conventional prime mortgages were seriously delinquent.12 Also 

of possible concern are vintage data trends, which show 

how pools of primary and junior-lien subprime mortgages perform over time. Mortgages originated in 2000 

are performing poorly in relation to previous years’ vintages.13 This simply could reflect the impact of the current 

recession. Alternatively, Loan Performance Corporation 

analysts have suggested that the 2001 refinancing boom 

might have created some adverse selection in mortgage 

pools originated during the relatively higher interest rate 

environment of late 1999 and early 2000.14 Because high11 The Market Pulse, Loan Performance Corporation (formerly Mortgage Information Corporation), Winter 2001 and Fall 2001. 

12 The Market Pulse, Loan Performance Corporation, Fall 2001. 13 Per Loan Performance Corporation delinquency data, subprime primary mortgages originated in 2000 displayed higher delinquency 

ratios for their age compared with similarly seasoned subprime loans 

originated in 1996, 1997, 1998, or 1999. Moody’s second-quarter 

2001 Home Equity Index Update found the same to be true of subprime home equity loans. 

14 “Another Look at the 2000 Book,” The Market Pulse, Loan Performance Corporation (formerly Mortgage Information Corporation), 

Winter 2001. 

er-coupon and variable-rate loans comprised a significant 

share of mortgage originations during that period, overall 

prepayment rates on the 2000 vintage might have been 

unusually high during 2001. Consequently, the best-quality loans in the 2000 pool might have refinanced, leaving 

loans of lesser credit quality behind and elevating the 

residual delinquency experience in that pool. 

Given these trends, an important issue for subprime 

lenders is their ability to anticipate and plan for the 

impact of an economic slump on their operations. Some 

institutions clearly adopt subprime lending as part of an 

overall business strategy, setting up monitoring and collection departments geared to dealing with such loans. 

Among large, national lenders, for example, one institution that makes 5 to 10 percent of its loans to subprime 

borrowers recently provided additional resources to its 

loan services and default management departments. This 

action followed a period when one-third of its increase in 

nonperforming single-family mortgage loans was associated with loans to subprime borrowers.15 

C&D Lending Risks May Be Elevated in MSAs 

with Potential Supply/Demand Imbalances 

Historically, lending to finance housing construction is 

riskier than mortgage lending on existing structures. 

Insured institutions report construction and development 

(C&D) lending in a single category that includes both 

commercial and residential construction. While it is thus 

impossible to ascertain from quarterly call reports the 

extent of bank involvement in financing housing construction, anecdotal evidence suggests that, although 

smaller insured institutions engage to some degree in 

commercial property development, their C&D lending 

largely finances single-family construction. If markets 

with an oversupply of housing see weaker economic performance, insured institutions engaged in financing residential real estate development may be at risk. This could 

result in an increase in C&D loan delinquencies, losses, 

and other-real-estate-owned (OREO). 

Demand for housing can be affected by two distinct 

trends: secular, or longer term; and cyclical, or shorter 

term. Over the long term, demographic trends, such as 

population growth rates and concentrations of households by age cohort, can affect overall demand for housing, as well as the types of homes demanded. Demand in 

local housing markets also can be affected by more cyclical factors such as recent changes in economic 

15 Calmetta Coleman, “Default Worries on Home Loans Escalate as 

Lenders Report Delinquency,” Wall Street Journal, October 29, 2001. 

Regional Outlook—National Edition 7 First Quarter 2002 
In Focus This Quarter
 

conditions, including interest rates. New supply of homes 

in local housing markets is produced in response to perceived or estimated future demand. Correct interpretation 

of market and economic signals is critical to the success 

of builders in metropolitan areas; however, this activity is complicated by the lags associated with developing, permitting, and constructing properties. The effect 

of overestimating future demand could be multiplied if 

several builders inaccurately gauge changes in 

demand. Consequently, a construction market with 

numerous smaller developers, such as Atlanta, may 

see amplified swings in construction activity and may 

experience excess supply during certain periods. 

Although conceptually straightforward, measuring the 

balance between housing demand and supply is challenging, particularly at lower geographic levels. Shortcomings in data availability, quality, and timeliness 

can limit the effectiveness of this type of analysis. As 

already mentioned, some insight about current housing 

market conditions in specific metropolitan areas may 

be gained by analyzing both secular and cyclical 

trends. However, given the onset of recession last year, 

the role of cyclical factors is of prime concern at this 

time. 

To measure the cyclical aspect of the relationship 

between a market’s supply and demand, some analysts 

rely heavily on the concept of employment-driven 

demand.16 Such analysis involves tracking a demand/ 

supply ratio based on employment growth and permit 

issuance. Areas where permitting activity continues to 

accelerate while employment levels decrease may produce an increasing imbalance in the local housing 

market.17 

Using a simplified version of employment-driven 

demand, we identified a number of metropolitan areas 

as being at risk for a rising imbalance in their housing 

markets (see Chart 5), the largest of which are Chicago, Greensboro (NC), Minneapolis, Phoenix, Portland (OR-WA), St. Louis, and, most notably, Atlanta. 

These markets are displaying signs that residential 

16 For example, see www.myersgroup.com. 17 This approach, although more reflective of recent economic events 

than perhaps more secular measures, is not without its drawbacks. For 

example, employment data from the Bureau of Labor Statistics’ establishment survey are frequently revised, and, consequently, employment-driven demand may need to be reexamined. 

CHART 5 

–120 

–100 

–80 

–60 

–40 

–20 

20 

40 

60 

(5,000) (2,500) 2,500 5,000 

December 2001 Year-to-Date Permits 

(Year-Ago Change) 

December 2001 Employment

(Year-Ago Change, Thousands) 

Sources: Bureau of Labor Statistics, U.S. Census Bureau (Haver Analytics) 

Some Larger MSAs Continued to See 

Permit Growth during 2001, despite 

Declining Employment 

0 

Greensboro, 

Minneapolis, 

& St. Louis 

Chicago 

Atlanta 

Portland, OR–WA 

Phoenix 

construction activity may not be responding in kind to 

local economies that have started to contract during 

this recession. Further, Phoenix, Portland, and Atlanta 

were identified previously as banking markets exhibiting elevated risk profiles.18 

Chart 6 displays the level (y axis) and trend (x axis) in 

C&D lending exposures for the top 25 MSAs by median C&D concentration as a share of assets.19 It is 

apparent that some markets identified in Chart 5 as 

having significant banking exposure to C&D lending 

also may have a cyclical imbalance in home building. 

Atlanta, for example, demonstrates one of the highest 

exposures, with a ratio of median C&D to total assets 

of 17 percent in third-quarter 2001, a roughly 100­

basis-point increase from year-end 2000. In other 

words, while employment-driven demand has softened 

in the metropolitan area, single-family construction 

activity has continued, and community bank lenders 

may have increased their level of residential financing 

commitments. 

Cyclical Risks May Be Developing 

with Respect to Home Prices 

Popular comparisons have been made recently 

between the healthy run-up in housing prices during 

18 See “In Focus This Quarter,” Regional Outlook, Fourth-Quarter 

2001. 

19 We considered only MSAs that had at least six locally headquartered community banks that engaged in C&D lending activity and 

then charted the top 25 MSAs ranked by September 2001 median 

C&D/assets. 

Regional Outlook—National Edition 8 First Quarter 2002 
In Focus This Quarter
 

CHART 6 

Some Banking Markets Are Seeing Rising Construction and Development (C&D) 

Exposure Coupled with Potentially Growing Supply/Demand Imbalances 

Sources: Bank Call Reports, Bureau of Labor Statistics, U.S. Census Bureau (Haver Analytics) Median C&D Loans-to-Assets (Third-Quarter 2001, %) 

0 

5 

10 

15 

20 

25 

30 

Change in Median C&D Loans-to-Assets 

(Percentage Point Change, from Fourth-Quarter 2000 to Third-Quarter 2001) 

–2 0 2 4 6 8 10 

Salt Lake City 

Atlanta Provo-Orem, UT 

Stockton, CA 

Greensboro 

Portland, OR–WA 

Phoenix 

MSAs with declining employment

 but rising permitting during 2001 

the past several years and the technology stock-fed 

speculative “bubble” in equity prices that persisted 

through early 2000. The subsequent bursting of this 

bubble and the resulting economic distress have raised 

concerns of a sequel featuring housing prices. 

According to the OFHEO repeat sales price index, 

there has never been an instance of outright declines in 

aggregate U.S. existing home prices.20 However, home 

prices do exhibit strong cyclical tendencies, with the 

rate of appreciation slowing during national recessions. In addition, there have been some decidedly 

CHART 7 

negative episodes during the past few decades in various metropolitan markets. At the national level, existing-home price growth historically has followed trends 

in population-adjusted personal income growth,21 and 

some have pointed to a growing imbalance between 

the two as a sign that home prices may weaken as the 

effects of the recession take hold (see Chart 7). 

Given that home price bubbles have occurred in the 

past, most notably in Texas, California, and the Northeast during the 1980s, and that their ultimate deflation 

MAP 1 

Change on Year Ago (%) Note: E=estimate 

Sources: OFHEO, U.S. Census Bureau 

The Widening Gap between Home Price and 

Income Growth Has Raised Some Concern 

Per Capita Income 

Home Price Index 

’85 ’87 ’91 ’93 ’97 ’01E ’89 ’95 ’99 

0 

2 

4 

6 

8 

10 

Drops in Affordability since the Mid-1990s
 

Are Most Prevalent in California 


and the Northeast
 

Top 10 percent of
 

MSAs ranked by decline
 

in affordability index, 1996
 

to 2001 (through June)
 

NOTE: Anchorage, AK, is included, but not shown. 

Source: Economy.com 

20 According to the National Association of Realtors’ U.S. median price, a few episodes of price declines (on a quarterly, year-ago basis) are present in the time series—specifically first- and second-quarter 1989; fourth-quarter 1990; and first-quarter 1993—only the 1990 episode occurred
 

during a recession. Also, as shown in Chart 1, U.S. median new home prices have experienced meaningful declines.
 21 This relationship is generally true at the metropolitan level as well.
 

Regional Outlook—National Edition 9 First Quarter 2002 
In Focus This Quarter
 

resulted in significant negative fallout for these areas’ 

economies and insured institutions, it is useful to look 

at these historical examples as a potential “worst-case” 

scenario (with very low probability) for residential 

real estate markets during the current recession. It is 

unlikely that significant, systemic risks from home 

price bubbles have arisen yet for residential lenders. 

Of course, this situation could change if the current 

recession deepens or is protracted, or if growth during 

the subsequent recovery is anemic. Further, national 

trends can obscure dramatic variations in local markets, and a handful of MSAs today are coming off several years of rapid home price growth and falling 

affordability. These markets, and the residential lenders 

targeting them, may be more at risk as local economic 

growth falters. 

Map 1 shows markets that have seen the most significant reductions in affordability (sharp price gains) 

during the past several years. Not surprisingly, many 

of them—namely larger cities in California and the 

Northeast—are those that historically have seen the 

biggest swings in prices and a penchant for speculative 

excess. 

In markets with rapidly declining affordability, credit 

risk arises from the increasing likelihood that new 

borrowers will commit a greater share of household 

financial resources to meet monthly payments. Credit 

problems could become more readily apparent given 

any subsequent disruptions to employment or income 

in these markets—especially among households with 

limited wealth or that require multiple job holders to 

meet mortgage payments. These risks may be amplified by the increased underwriting of HLTV and subprime mortgages during the past decade. 

Disruptions to aggregate household liquidity from lost 

employment or decreased income can result in rising 

mortgage delinquencies. With respect to foreclosures, 

however, some research has suggested that the decline 

in prices relative to the balance owed on the mortgage 

(rising loan-to-value ratio) is the most significant factor.22 Even in instances of prolonged job/income loss, 

owners with positive equity are likely able to sell their 

22 For instance, “Mortgage Default Risk and Real Estate Prices: The 

Use of Index-Based Futures and Options in Real Estate,” Case, 

Shiller, & Weiss, NBER Working Paper #5078, NBER, April 1995, 

finds this to be the case, while citing past work that identified the link 

between rising LTVs and foreclosure rates. 

CHART 8 

Rising Foreclosure Rates Followed Falling 

Home Prices in New England a Decade Ago 

Sources: OFHEO (prices), Mortgage Bankers Association (foreclosures) 

Annual Home Price Change (%) 

’79 ’84 ’89 ’94 ’99 

Inverse 

Price (R) 

Foreclosure (L) 

–20 

–10 

0 

10 

20 

30 

Foreclosure Started

(% of Existing Loans) 

0.00 

0.10 

0.20 

0.30 

0.40 

0.50 

homes profitably, thus avoiding foreclosure. Chart 8 

shows the strong relationship between declining home 

prices and increasing foreclosure rates in New England a decade ago (the chart plots the inverse price 

change in order to emphasize the relationship).23 

The data available through late 2001 were mixed with 

respect to home resale price trends at the MSA level. 

On the one hand, while existing home prices as measured by the OFHEO home price index showed no 

markets with year-over-year price declines in fourthquarter 2001, NAR’s median resale price metric did 

show about a dozen markets with year-over-year 

declines, none exceeding four percent. A deceleration 

in year-over-year home price growth was evident for 

many markets (and the nation) using either measure. It 

should be noted that the OFHEO data do not include 

sales of high-priced homes and are less influenced by 

changes in the mix of homes sold than are average and 

median prices;24 this issue is more meaningful in the 

nation’s most expensive markets, such as MSAs in the 

23 In states where dominant metro areas have seen large price declines 

in past years, such as Massachusetts, this relationship is more pronounced than in larger states or the nation as a whole. For example, 

the two-decade correlation between foreclosures started and price 

change is –78 percent in Massachusetts versus roughly –60 percent in 

both California and the nation. 

24 Data are obtained from aggregating repeat sales or refinancings of 

the same properties over time and using statistical methods to calculate an overall rate of home price appreciation for each market. Sampled properties are confined to those whose mortgages are 

“conventional” and do not exceed a conforming loan limit (set at 

$275,000 in 2001) required for securitization through Fannie Mae and 

Freddie Mac. For more information, see www.ofheo.gov/house/. 

Regional Outlook—National Edition 10 First Quarter 2002 
In Focus This Quarter
 

TABLE 1 

As Recession Evolved, Home Price Appreciation Waned through 2001 

...Further Deceleration in Growth (or Declines) May Be Possible in 2002 

ANNUAL PERCENT CHANGES 

MSAS RANKED 

BY DECELERATION 

IN HOME PRICE INDEX 

FROM 1Q01 TO 4Q01 

OFHEO HOME PRICE INDEX 

NONFARM 

EMPLOYMENT 

1998– 

2000 1Q01 2Q01 3Q01 4Q01 

1998– 

2000 2001 

UNITED STATES 6.3 9.6 9.1 8.8 6.9 2.4 0.3 

SAN JOSE CA PMSA 17.7 24.4 16.9 8.4 0.6 3.4 –0.4 

SANTA CRUZ-WATSONVILLE CA 

PMSA 16.8 25.7 17.3 11.9 5.9 N/A N/A 

SAN FRANCISCO CA PMSA 16.5 19.4 13.9 9.1 3.5 3.3 1.3 

SALINAS CA MSA 13.7 24.3 22.4 19.0 9.4 3.3 0.9 

SANTA ROSA CA PMSA 14.8 22.7 19.6 13.6 8.6 4.1 1.6 

OAKLAND CA PMSA 14.7 22.3 18.0 14.1 8.2 3.4 2.0 

AUSTIN-SAN MARCOS TX MSA 9.4 15.2 12.1 7.7 5.0 5.9 2.1 

MERCED CA MSA 6.4 24.6 21.8 17.3 15.7 N/A N/A 

JAMESTOWN NY MSA 4.9 9.9 0.8 7.4 1.6 N/A N/A 

STOCKTON-LODI CA MSA 9.0 22.8 25.2 20.6 14.9 3.7 3.0 

WHEELING WV-OH MSA 4.1 10.8 7.7 11.7 3.7 1.1 –0.5 

GOLDSBORO NC MSA 4.0 7.9 3.2 1.6 0.9 N/A N/A 

CUMBERLAND MD-WV MSA 2.7 8.6 8.4 8.1 1.8 N/A N/A 

LEWISTON-AUBURN ME NECMA 4.2 14.0 8.6 10.1 7.1 4.4 –0.4 

BANGOR ME NECMA 3.7 13.2 7.4 9.3 6.5 N/A N/A 

FARGO-MOORHEAD ND-MN MSA 4.0 11.1 6.5 5.4 4.6 2.1 –0.3 

BARNSTABLE-YARMOUTH MA 

NECMA 12.8 17.6 14.5 14.6 12.5 3.9 1.3 

PINE BLUFF AR MSA 2.2 6.6 9.7 5.0 0.3 0.8 –1.7 

DUBUQUE IA MSA 3.9 8.8 6.0 6.9 2.5 1.1 –0.6 

BOULDER-LONGMONT CO PMSA 10.9 14.6 11.7 11.7 8.3 5.1 3.2 

DENVER CO PMSA 11.1 13.7 11.8 10.9 7.9 3.8 2.3 

UTICA-ROME NY MSA 3.5 14.6 9.5 8.4 9.1 2.4 0.1 

VALLEJO-FAIRFIELD-NAPA CA PMSA 11.8 20.0 19.1 16.6 14.7 4.7 2.8 

BRYAN-COLLEGE STATION TX MSA 4.8 11.1 2.1 5.6 5.8 4.0 0.7 

SAN DIEGO CA MSA 11.8 15.6 13.8 12.9 10.4 4.3 2.7 

SAN LUIS OBISPO-ATASCADERO­ PASO ROBLES CA MSA 11.4 19.2 18.0 17.8 14.2 N/A N/A 

TUCSON AZ MSA 3.3 8.6 8.0 6.8 3.6 3.5 0.8 

JERSEY CITY NJ PMSA 8.0 11.1 17.6 13.7 6.2 2.1 2.7 

CLARKSVILLE-HOPKINSVILLE TNKY MSA 3.3 9.1 4.2 6.5 4.2 N/A N/A 

RAPID CITY SD MSA 6.2 8.9 9.3 7.7 4.1 3.1 0.1 

LA CROSSE WI-MN MSA 5.7 7.4 5.8 5.1 2.6 2.3 1.0 

ST. CLOUD MN MSA 6.9 10.4 8.5 9.4 5.7 3.8 1.4 

Sources: Office of Federal Housing Enterprise Oversight (OFHEO), Bureau of Labor Statistics 

Regional Outlook—National Edition 11 First Quarter 2002 
 

In Focus This Quarter
 

San Francisco Bay Area25 and parts of the Northeast, 

since prices for high-end homes (typically financed by 

jumbo mortgages) may be more volatile over the economic cycle. 

Table 1 lists markets whose 2001 deceleration in home 

price growth was in the top 10 percent of the more 

than 300 metro areas for which the OFHEO statistic is 

available. The table also provides (where available) 

each MSA’s recent employment trend as an indicator 

of overall economic conditions. These markets may yet 

see even more pronounced deceleration in home price 

growth or even declines in home prices this year (as 

may others not shown). This possibility will be determined for the most part by the performance of each market’s local economy. 

The metro areas in the table are 

ordered by the magnitude of their 

deceleration in home price growth 

over the initial quarters of this recession. As a result, the marked deceleration in year-over-year price 

growth in the recently overheated 

San Francisco Bay Area puts many of its MSAs near the 

top of the list. In the table, San Jose, San Francisco, 

Oakland, Denver, and San Diego also previously were 

identified as banking markets with elevated risk profiles.26 For some of the smaller MSAs in Table 1 with 

more volatile appreciation rates, such as Utica and 

Fargo, comparisons of recent price trends are more 

appropriate using the 1998–2000 average as a benchmark, as these markets experienced pronounced spikes in 

year-ago price growth during first-quarter 2001. 

It is hard to generalize about which markets will see the 

most pronounced home price weakness as the recession 

continues. However, certain markets have shown a tendency in the past to be driven to a greater degree by speculative, rather than fundamental, factors. These markets 

are more likely to see significant downward corrections 

in price when economic activity falls for a prolonged 

period or by a sufficient magnitude. One study from the 

mid-1990s found, in comparing 14 cities in the Northeast and West with 16 inland cities, that while both 

groups tended to respond similarly to local and national 

25 As considered here, this includes the following MSAs: San Jose,
 

Santa Cruz-Watsonville, San Francisco, Santa Rosa, Oakland, Salinas, and Vallejo-Fairfield-Napa.
 

26 See “In Focus This Quarter,” Regional Outlook, Fourth Quarter
 

2001.
 

economic forces (fundamental, or “equilibrium,” price 

drivers), prices in the former group tended to be influenced to a greater degree by speculative, or “disequilibrium,” variables, including recent trends in price 

appreciation.27 Cities along the nation’s coasts also have 

tended to see the most significant price swings over the 

past 20 years. 

History also provides some insights into the nature and 

extent of any price declines in markets where economic 

conditions deteriorate. A study of two significant examples, Boston and Los Angeles in the 1980s and early 

1990s, concluded that declines differed by property type 

(i.e., condos versus single-family) and price class (i.e., 

high-end versus entry-level).28 This dispersion in price 

declines arose from differing rates of appreciation (properties that experienced the greatest inflation during the 

boom saw the largest deflation) and from the nature of 

each city’s economic decline, which differed according to 

concentrations of job losses by industry and wage type, 

underlying demographic factors, and housing supply 

trends. 

Looking at recent developments, it seems that the greatest near-term risk of a significant downward adjustment 

in housing prices is in the San Francisco Bay area. In 

recent years, this area witnessed double-digit home price 

appreciation that exceeded growth in per capita income 

by a wide margin. A recent analysis from the University 

of California-Berkeley’s Haas School of Business forecast that prices in the Bay Area housing market will 

decline by 15 percent overall (and by 30 percent for luxury homes) by the time the local economy’s recession 

ends late this year.29 Meanwhile, the larger MSAs in 

Southern California have not seen as significant a disparity between home price appreciation and personal 

income growth during this cycle as during the 1980s. 

Also in contrast to the 1980s, New England (and the 

Northeast generally) has seen little speculative purchase 

or construction activity in recent years, which should 

help to mitigate any price weakness through the current 

recession in these markets.30 

27 Jesse M. Abraham and Patric H. Hendershott, “Bubbles in Metropolitan Housing Markets,” Working Paper #4774, NBER, June 1994. 

28 Karl E. Case and Robert J. Shiller, “A Decade of Boom and Bust in 

the Prices of Single-Family Homes: Boston and Los Angeles, 1983 to 

1993,” New England Economic Review, March/April 1994. 29 David Goll, “Bay Area Housing Market Will Remain Slow,” East 

Bay Business Times, January 23, 2002. 30 “Regional Perspectives,” Boston Region, Regional Outlook, First 

Quarter 2002. 

Regional Outlook—National Edition 12 First Quarter 2002 
In Focus This Quarter
 

Conclusion 

Home prices are holding up in most markets, and, generally, permanent residential mortgages have fared 

well in prior recessions. However, history might 

understate credit risks for insured institutions during 

this cycle because the mortgage lending business has 

changed since the last recession. Chief among these 

changes are robust mortgage market competition, 

which has contributed to narrower collateral margins; 

increased reliance on underwriting automation; and 

expanded involvement in the subprime credit market. 

In addition, residential C&D lenders in certain markets might be particularly vulnerable, since C&D credits typically undergo higher loss rates and some areas 

are experiencing continued construction despite a 

cyclical slowdown (as measured by employment 

trends). Permanent mortgage lenders in certain areas, 

such as the San Francisco Bay area, could also face 

higher loss rates and foreclosures going forward, as the 

current economic weakness places downward pressure 

on home prices and dampens the ability of households 

to meet mortgage payments. 

Scott Hughes, Regional Economist 

Judy Plock, Senior Financial Analyst 

Joan Schneider, Regional Economist 

Norm Williams, Regional Economist 

Regional Outlook—National Edition 13 First Quarter 2002 
Regional Perspectives
 

Atlanta Regional Perspectives
 

The nation’s economic landscape has altered dramatically over the past year, creating possibly the 

most challenging environment in a decade for 

insured institutions. Unlike the 1990/1991 recession, 

which was preceded by regional economic downturns in 

many areas of the country, the current recession is being 

felt both domestically and globally. This global economic weakness may affect the depth and duration of 

the current national recession and the timing and 

strength of a recovery. The uncertainty and subsequent 

disruptions caused by the events of September 11 intensified the economic downturn that began last spring. 

Various sectors of the economy face many challenges. Business investment may be slow to revive 

because of reduced corporate profits and underutilized 

plants and equipment. Near-record consumer debt levels and service burdens, along with a lack of pent-up 

demand, may forestall a surge in consumer spending. 

Weak global growth coupled with continued strength in 

the trade-weighted value of the U.S. dollar could 

restrict export opportunities. Fiscal stimulus at the 

federal level may be offset by budget cuts or tax 

increases by states or municipalities facing budget 

shortfalls. Monetary policy may take some time 

to spur economic growth as real shortterm interest rates (federal funds rate 

less inflation rate) remain positive. 

Consequently, a quick and robust 

recovery may prove elusive. A persistent disinflationary or outright deflationary environment could present insured 

institutions with significant challenges. Loan quality 

could be affected in two ways: collateral asset values 

could decline, and borrowers’ ability to service debt 

could be reduced if incomes and cash flow fall. 

The Region’s insured institutions that hold large 

lending concentrations (at least 15 percent of assets) 

in traditionally higher-risk categories may be more 

vulnerable to the effects of the current economic 

downturn. Within the Region, 361 community banks 

(assets less than $1 billion) held large concentrations in 

construction and development loans or commercial and 

industrial loans at third-quarter 2001. During the last 

recession, community banks with a high lending concentration in these categories were twice as likely to 

receive a problem bank rating. 

Although the capital cushion at Atlanta Region community banks with a high lending concentration has 

declined modestly, capital levels among other community banks have increased. Community banks in the 

Region with a high lending concentration report an 

average equity-to-asset ratio of 10.68 percent. In contrast, the average equity-to-asset ratio among other 

community banks has increased 88 basis points to 12.51 

percent since the last recession. 

The Region’s new insured institutions also may be at 

greater risk during the current downturn. About 25 

percent of the nation’s “non-recession-tested” insured 

institutions are headquartered in the Atlanta 

Region. Historically, such institutions are 

more likely to receive a problem bank 

rating or fail when they first experience 

an economic downturn. 

Historically strong financial conditions 

among many of the Region’s insured 

institutions may erode if the economic 

downturn continues. A prolonged period of 

slow or negative economic growth combined with 

a softening in asset prices, particularly for commercial and residential real estate, could have 

significant repercussions for certain types of 

the Region’s insured institutions. Such an 

environment would likely be more challenging 

for community banks with high lending concentrations and startups experiencing their first recession. Typically, these types of institutions perform best 

in a rapidly growing economy. For this reason, banks 

with concentrations in traditionally higher-risk assets or 

that have adopted a business model that relies on rapid 

economic growth should evaluate their ability to operate during a period of slow economic growth. 

Regional Outlook—National Edition 14 First Quarter 2002 
Regional Perspectives
 

Boston Regional Perspectives
 

The current economic environment in the Region 

differs from the recession in the early 1990s, when 

cyclical weakness was compounded by downsizing 

in the defense industry and overbuilding in the 

commercial real estate sector. However, certain whitecollar industries, such as software and telecommunications, have been more significantly affected than other 

sectors of the economy during the current recession. 

A recent study conducted by Northeastern University 

reported that layoff announcements in Massachusetts 

have been concentrated among information technology 

(IT) companies, and that unemployment claims in the 

third quarter were rising three to five times faster 

in areas with concentrations in IT employment. 

The Region’s housing market is cooling but 

remains a faint bright spot in the economy. 

Existing home sales growth in the Region was 

weak through third-quarter 2001 compared with 

the nation, but remained positive. New home 

construction, as measured by building permit 

issuance, slowed in the Region through 2001 following strong gains in the late 1990s. Despite the 

softening economy, home price appreciation continued 

in metropolitan areas throughout the Region in 2001, 

suggesting that the weakness in sales was not due to a 

softening in demand. 

The fundamentals of the current housing market are 

stronger than during the previous recession. Residential 

real estate markets in the Boston Region boast little 

speculative building and a generally limited inventory 

of unsold homes. However, should the economic downturn continue for some time, softening in housing prices 

could become widespread. 

For many of the Region’s insured institutions, the 

growing concentration of investment in long-term 

assets may be heightening interest rate risk. The rising exposure is particularly pronounced among the 

Region’s small savings institutions (total assets < $1 billion); however, many of the trends noted for these institutions are present in large savings banks and 

commercial banks as well, albeit to a lesser degree. 

The persistent decline in net interest margins that has 

eroded earnings steadily over the past few years appears 

to be a major contributing factor to the growing concentration in long-term assets. As a result, many institutions are holding higher-yielding, long-term fixed-rate 

assets in an effort to keep margins from falling further. 

These efforts to protect the current earnings stream may 

place longer-term earnings at risk if interest rate risk 

management does not contain exposure to rising interest rates. In 1995, just 10 percent of savings institutions 

reported that long-term assets exceeded 40 percent of 

earning assets. As of September 30, 2001, more than 

half reported a similar concentration level. The 

record level of refinancing that occurred in 

the fourth quarter of 2001 will likely result 

in higher long-term asset concentrations 

in the short term. 

While asset maturities continue to 

lengthen, liabilities remain short. Of 

all time deposits in the Region’s savings 

institutions, 75 percent mature or reprice in 

one year or less. This percentage actually has 

risen over the past few years as customers 

have become less willing to invest in longerterm instruments. 

Longer-dated borrowings are being reported by the 

Region’s savings institutions; however, this lengthening of maturities may not be reducing exposure to 

higher interest rates. The Federal Home Loan Bank of 

Boston, the primary source of term borrowings for the 

Region’s savings institutions, reported that as of yearend 2000, approximately 63 percent of longer-term 

advances (with remaining stated maturity of more than 

three years) could be redeemed early at the lender’s 

option, with most callable within one year. This fact 

suggests that a high percentage of the longer-maturity 

borrowings reported on Call Reports are, in effect, 

short-maturity liabilities in the event of a rising rate 

environment. 

Clearly, interest rate risk is rising among the Region’s 

savings institutions. Asset maturities continue to lengthen while liabilities remain short. Optionality is becoming a key funding issue, and measuring and projecting 

the sensitivity of core deposits to rising rates will prove 

difficult. As a result, interest rate risk measurement 

and management are becoming increasingly complex. 

Steps can be taken to mitigate some of the risk; however, there will be a trade-off between short-term profits 

and long-term earnings stability. Now is a good time 

for institutions to take action. When the rate cycle 

begins to turn, risk reduction strategies may be much 

more difficult to implement. 

Regional Outlook—National Edition 15 First Quarter 2002 
Regional Perspectives
 

Chicago Regional Perspectives
 

The effects of the national recession are keenly felt. 

The Chicago Region’s unemployment rate of 5.4 percent in December 2001 was noticeably higher than its 

3.8 to 4.0 percent range during the past three years. 

However, unlike most prior recessions, recent deterioration in the Region’s labor markets has not been more 

severe than in the national market. This dissimilarity 

reflects, in part, the fact that the current economic 

slump involves such sectors as computers, air transportation, and tourism, which are not heavily concentrated in the Region. Even so, output of durable goods 

manufacturers, which are concentrated locally, continues to decline sharply. Consequently, year-end 2001 

employment in the Region was 1 percent lower than a 

year earlier, with manufacturing employment 5 percent 

lower. 

Lower interest rates are helping sustain 

demand for interest-sensitive items and 

enhancing borrowers’ repayment ability 

despite slower growth in personal income 

and corporate profits. Even so, corporate 

bankruptcies rose noticeably in the past year, 

and signs of repayment problems are emerging 

among households. Should government payments to farmers, a major income source in 

some agricultural communities, be reduced 

under the provisions of a new farm bill, signs of 

stress also could become evident among the 

Region’s small farmers. 

Rapid declines in interest rates are affecting net 

interest margins (NIMs) and asset and liability management. Insured-institution NIMs generally have been 

shrinking over the past decade. Recently, however, 

short-term rates have fallen, causing the yield curve to 

change from inverted in late 2000 to steep and upward 

sloping by the end of 2001. Consequently, margin compression has reversed in recent quarters amid changing 

customer preferences and a substantially altered asset 

and liability management environment. 

Falling mortgage rates triggered a surge in refinancing 

activity and spurred borrower preference for longerterm, fixed-rate mortgages. Higher volumes of mortgage origination activity have been a boon for many 

lenders, generating more fee income. However, unanticipated principal prepayments can present challenges for 

banks and thrifts. As long as interest rates remain low, 

borrowers are expected to maintain a preference for 

fixed-rate mortgages. 

Securities portfolio trends are helping boost asset 

yields; however, these trends also increase portfolio 

sensitivity to changes in interest rates. Securities continue to represent a declining percentage of insured 

institutions’ assets, and there has been a shift toward 

mortgage-backed securities and U.S. Agencies away 

from U.S. Treasuries. Also, a general lengthening of 

maturities or earliest repricing dates among mortgagebacked and corporate debt securities has occurred. Generally speaking, although current NIMs should be 

helped by these moves, a higher share of longer-term 

and mortgage-backed securities is expected to increase 

the sensitivity of securities portfolios to interestrate fluctuations. 

Retail customers now appear to favor shorter-term time deposits as well as nonmaturity money market deposit accounts 

and savings accounts. Accompanying 

this change is a move toward longerterm funding in situations where 

management has the most control over 

funding maturities, such as brokered 

deposits and Federal Home Loan Bank 

borrowings. Depositor movement toward 

shorter-term instruments will generally help margins in the near term, but this type of funding may 

reprice quickly when short-term rates increase. 

Balance sheet changes associated with falling shortterm interest rates in 2001 may have increased the 

exposure of certain insured institutions to rising 

rates. Banks and thrifts seeking to maximize current 

NIMs by increasing long-term, fixed-rate assets and 

shifting toward earlier repricing and shorter-term liabilities may be vulnerable should short-term interest rates 

rise or the yield curve flatten. Prudent interest rate risk 

decisions can be made only by reviewing the totality of 

an individual institution’s rate-sensitive assets and liabilities. To that end, bank management now can review 

how well interest rate risk management systems performed during the recent period of substantial interest 

rate changes. In addition, management has the opportunity to ensure that their institutions are well positioned 

should interest rates either rise or experience significant, nonparallel shifts, such as happened in 2001. 

Regional Outlook—National Edition 16 First Quarter 2002 
Regional Perspectives
 

Dallas Regional Perspectives
 

Potential exists for weakening housing price growth 

in key Dallas Region metropolitan markets. Denver 

and Austin were two of the nation’s fastest-growing 

metropolitan economies during the past ten years. In 

addition to robust employment levels, housing activity 

in these markets has been strong, spurred more recently 

by declining mortgage interest rates. However, economic weakening, whether the result of the aftermath of the 

September 11, 2001, attacks or of the slowing national 

economy, or both, is undermining the strength of these 

housing markets. Both metropolitan statistical areas 

(MSAs) may be vulnerable to weakening housing price 

growth because of overbuilding and sharp declines in 

employment growth. 

Denver’s housing market appears more vulnerable 

to flagging housing price growth. Since mid-2001, the 

Denver economy has been adversely affected by the 

slowing U.S. economy and the effects of September 11. 

Year-to-year job growth rates have decelerated every 

month since April 2001, and employment declined 0.3 

percent in fourth-quarter 2001 from a year ago. 

Employment losses have spread beyond the metro area’s 

ailing telecommunications, manufacturing, and travel 

industries and now are occurring among industries that 

represent 55 percent of Denver’s total nonfarm employment. 

Rapidly rising home prices during a period of deteriorating employment growth are unsustainable and could 

portend significant slowing in housing price growth in 

the Denver market. The decline in housing affordability 

could be particularly problematic for the first-time 

buyer and could dampen trade-up markets. Denver’s 

housing market is overbuilt, and a substantial slowing in 

residential construction through 2002 is expected. Poor 

economic fundamentals (deteriorating employment 

conditions), declining housing affordability, and residential overbuilding are expected to contribute to considerable softening in home price growth in 2002. 

The Austin MSA also experienced a deceleration in 

employment and home price growth in 2001. The 

Austin economy has been adversely affected by weakness in the computer, telecommunications, and semiconductor sectors, as well as the serious decline in the 

dot-com industry. However, housing affordability in the 

Austin metropolitan area remains comparable to the 

national average. Still, a growing supply/demand imbalance in residential construction exists. 

Housing price growth in the Austin metropolitan area is 

slowing, particularly for high-priced homes. This sector 

of the real estate market 

had been hit hard by weakening in the high-tech sector and the failure of 

many Internet startup 

companies. Although 

housing prices are not 

expected to depreciate 

this year, prolonged difficulties in the high-tech 

sector could change the outlook 

for home prices in this MSA. 

The Dallas, Fort Worth, and Houston 

economies are characterized by relatively moderate 

employment growth rates and do not show any serious signs of overbuilding. As a result, home prices are 

not expected to decline in these housing markets. 

Employment growth and affordable housing are likely 

to support some housing price appreciation in these 

markets in 2002, albeit at a slower pace. 

Recent developments affecting collateral values suggest that risk in mortgage lending may be growing. 

The loan-to-value ratio of many new mortgages is 

increasing. More than 20 percent of all mortgages originated nationwide in 2001, almost three times the level 

in 1990, were for more than 90 percent of the value of 

the house. In addition, the increasing volume of cashout refinancings has reduced homeowners’ equity. 

Although home prices in these MSAs have not shown 

widespread declines, anecdotal reports suggest that 

high-end home prices are coming under pressure, especially in markets that experienced substantial growth in 

the high-tech sector in the late 1990s but have slowed 

since. 

Recent rapid growth in mortgage portfolios among 

insured institutions in the five MSAs examined in this 

article suggests that many of these mortgages are not 

seasoned and are based on relatively high real estate 

values. Should home prices decline, many of these 

mortgages would be left with leaner collateral positions. 

Regional Outlook—National Edition 17 First Quarter 2002 
Regional Perspectives
 

Kansas City Regional Perspectives 


Wichita could be the Region’s metropolitan statistical area (MSA) most affected by the aftermath of the 

terrorist attacks. Demand for airline travel dropped 

precipitously following the September 11, 2001, 

attacks. The travel industry and related companies, such 

as aircraft manufacturers, were affected most adversely. 

The health of the Wichita economy is strongly tied to 

the aircraft manufacturing sector, which includes the 

area’s top four employers; these companies announced 

significant layoffs or other employment changes following the attacks. Layoffs and any ripple effects could 

contribute to as much as a 1.6 percent rise in the unemployment rate in 2002.1 

A weakened economy may make it more difficult for 

businesses and individuals to repay loans at a time when 

insured institutions headquartered in the Wichita area 

have heightened credit risk. In the aggregate, institutions in Wichita experienced significant growth during 

the past three years in construction and development, 

nonresidential commercial property, and business lending, all of which are traditionally higher-risk forms of 

lending. 

Fortunately, Wichita’s insured institutions currently 

report solid financial conditions. Asset quality indicators remain favorable compared with historical levels. 

The number of problem institutions and those with troubled asset portfolios is small. 

The Region’s commercial real estate markets have 

experienced the brunt of the recession. Data suggest 

that all commercial real estate (CRE) submarkets— 

office, industrial, retail, multifamily, and hotel—have 

weakened to some degree in the Kansas City Region’s 

three major metropolitan areas: Minneapolis-St. Paul 

(Minneapolis), St. Louis, and Kansas City. 

Office and industrial markets show high vacancy 

rates. Torto Wheaton Research data show that the 

office vacancy rate for Kansas City significantly 

exceeds the national rate (which increased 4 percentage 

points during the first three quarters of 2001). Vacancy 

Center For Economic Development and Business Research, 

W. Frank Barton School of Business, Wichita State University, 

Wichita’s Economic Outlook 2001 Review and 2002 Forecast. 

rates for the Minneapolis and St. Louis markets are in 

line with the nation’s. 

Minneapolis, St. Louis, and Kansas City industrial markets are experiencing rising vacancy rates, but rates 

remain below the national level. Minneapolis appears to 

be the most vulnerable to the high-tech sector slowdown 

in large part because of higher concentration in research 

and development industrial space. 

Retail space and multifamily housing vacancy rates 

have risen but are not alarming. Vacancy rates for 

retail space in Minneapolis, St. Louis, and Kansas City, 

although they reached historically low levels in firstquarter 2000, are expected to rise through much of 

2002, but not to levels that may cause concern. 

The Minneapolis apartment market remains 

extremely tight. By contrast, the multifamily 

housing markets in St. 

Louis and Kansas City 

are characterized by 

significant new supply 

and sagging demand, 

a situation most pronounced in Kansas 

City. 

Insured institution exposure to CRE stands at the 

highest level in a decade. Insured institutions in the 

Region’s three major MSAs are reporting rapid growth 

in CRE lending and relatively high exposures to this 

loan type. This growth is occurring as property markets 

have begun to weaken, suggesting that institutions hold 

the highest level of new, or “unseasoned,” CRE loans in 

the past decade. 

However, current insured institution CRE exposures 

remain at or below the national level. In addition, 

although the CRE markets in Kansas City, Minneapolis, 

and St. Louis have weakened somewhat, they are not 

among the weakest in the country. Therefore, although 

insured institutions in these three MSAs face greater 

challenges related to CRE lending, banks and thrifts in 

other metropolitan areas could experience greater deterioration in loan quality. 

Regional Outlook—National Edition 18 First Quarter 2002 

1 
Regional Perspectives
 

Memphis Regional Perspectives
 

The mid-South entered a period of economic decline 

prior to the national recession and underperformed 

the national economy in 2001 because of a heavy 

reliance on a weak manufacturing 

sector. The Region’s apparel, automotive parts producers, furniture and fixtures, and lumber industries were among 

the sectors most affected by the overall 

slump in manufacturing. 

As a result of the disparate economic 

weakness, banks and thrifts in the 

Region faced greater credit quality 

deterioration than those in many other 

areas of the country. Not surprisingly, banks 

and thrifts operating in those parts of the mid-South 

with the highest exposure to the manufacturing sector 

reported the most significant drop in credit quality. 

The Region’s manufacturing sector may be slow to 

recover when the nation’s economy begins to 

improve. By year-end 2001, national manufacturing 

activity had begun to improve. However, the Region’s 

manufacturing problems stem from structural and cyclical changes, suggesting that improvement in the regional manufacturing sector may lag that of the nation. For 

example, job losses in the apparel sector, which are likely to continue, appear to be permanent. Also, a previously strong automobile production sector has begun to 

weaken. Production volume, distinct from industry 

profitability, remained stable largely because of strong 

incentives, such as rebates and zero percent financing. 

The possibility that these incentives pulled automobile 

sales in 2001 from future sales and an increasing global overcapacity appears likely to lead to reduced automobile production. 

Interest rate risk appears to have increased as banks 

and thrifts faced incentives to increase exposure levels in 2001. Incentives include the need to mitigate 

margin erosion, rapid balance sheet turnover, and a progressive steepening of the yield curve. The current 

steepness of the yield curve indicates that most market 

participants expect interest rates, particularly short-term 

rates, to rise. Rising short-term rates are likely to have 

an adverse effect on already depressed margins. The 

extent of the drain on an institution’s earnings performance will be influenced largely by current asset/ 

liability management. Managers must carefully weigh 

the trade-off of extending assets in an 

effort to improve margins against 

the potential adverse effects such 

asset extension could have on 

future earnings during a period 

of rising interest rates. 

Most banks reported limited asset extension as of September 30, 2001. The level of longterm assets (assets with more than five years until 

maturity or repricing) held by all community 

banks in the Region rose from 15.8 percent of 

total assets at year-end 2000 to 16.4 percent as of 

September 30, 2001. Some institutions, many of 

which were already facing earning pressures, 

accepted much greater asset extension. 

The incentive to extend intensified as the yield curve 

steepened sharply in late 2001. The asset extension that 

occurred during the first nine months of 2001 could 

continue at some institutions because a potential rate 

“trap” developed in late 2001. Short-term rates (3-, 6-, 

and 12-month rates) dropped by 140 to 170 basis points 

from August 31 to December 30. By comparison, longterm rates (10- and 30-year rates) rose slightly during 

this period. By year-end 2001, managers faced the 

alternatives of investing short-term at less than 2 percent or gaining 250 to 300 basis points by investing in 

intermediate- or long-term loans or securities. 

Even as assets extended during the first nine months of 

2001, depositors migrated to shorter-term products, 

leading to a modest contraction in liability maturities 

and repricing intervals. This change in customer preferences included an increase in aggregate balances of 

money market demand accounts and savings accounts 

and a switch from longer-maturity certificates of 

deposits to those with maturities of one year or less. 

Interest rate risk management will likely become 

more complex and important in 2002. The potential 

for continuing interest rate volatility, this time in a rising rate environment, suggests that sound asset/liability 

management will be particularly critical to future earnings performance. At a minimum, managers should 

ensure that measurement processes accurately assess 

the effects of changing interest rates on performance, 

and that institutions operate within sound risk tolerances established by policy or board direction. 

Regional Outlook—National Edition 19 First Quarter 2002 
Regional Perspectives
 

New York Regional Perspectives
 

The September 11 attacks contributed to weakening 

in the Region’s economy. Before the attacks, the 

Region’s economy, although slowing primarily because 

of deterioration in the manufacturing sector, was 

stronger than the nation’s. However, the aftermath of 

September 11, 2001, contributed to weakening in the 

Region’s key sectors, including the financial, airline, 

and tourism industries. Furthermore, slowing in 

the national economy following the attacks 

contributed to additional job losses in the 

Region’s manufacturing sector. 

Post-September 11 conditions may result in 

more layoffs in the Region than in the 

nation, particularly in areas that depend on 

industries adversely affected by the attacks. 

The Region’s rate of job growth, while keeping pace 

with the nation’s before September 11, also may lag the 

nation in the post-attack period because of the economic weight of New York City. Though the Region’s economic recovery may not match the nation’s in timing or 

strength, it is unlikely to be as prolonged or painful as 

the Region’s recovery in the early 1990s. The pace and 

vitality of any recovery is likely to depend on several 

factors, including the industrial mix of local economies 

and the “pull” effect from the national economy. 

The Region’s office market conditions weakened 

moderately in 2001, primarily reflecting reduced 

demand rather than excess supply as was the case a 

decade ago. Office vacancy rates increased in most of 

the Region’s major cities in 2001, consistent with 

national trends, but remained below or near the national average. Vacancy rates rose sharply in downtown 

Manhattan as tenants flooded the market with sublet 

space.1 Despite migration of businesses from lower 

Manhattan, vacancy rates also increased in midtown 

Manhattan and in northern and central New Jersey 

because of the influx of sublet space. Unlike Manhattan, 

however, which has added minimal new space, northern 

New Jersey is facing reduced demand for office space 

while a moderate amount of construction is nearing 

completion.2 

1 According to C.B. Richard Ellis, lower Manhattan’s office vacancy 

rate tripled, to 10.6 percent in fourth-quarter 2001 compared with 

11.0 percent for the nation.
 2 Gordon, Sally, January 4, 2002. “CMBS: Red-Yellow-Green Update
 

Fourth Quarter 2001 Quarterly Assessment of U.S. Property Markets,”
 

Moody’s Investor Service.
 

Banks are better positioned now than during the last 

recession, but challenges lie ahead. Though credit 

quality ratios reported by the Region’s insured institutions are more favorable than a decade ago, weakness is 

becoming more widespread. In third-quarter 

2001, one-third of the Region’s banks reported 

at least a 25-basis-point quarter-to-quarter 

increase in the past-due ratio, a slightly higher 

percentage than a year ago. 

The Region’s large banks (total assets 

over $10 billion) reported continued 

credit quality deterioration, primarily in 

commercial and industrial (C&I) loans. Community and regional banks3 reported slightly 

higher C&I delinquencies, which suggests that 

weakness, to some extent, has migrated to smalland middle-market businesses. Community and 

regional banks also reported moderately higher commercial real estate (CRE) loan delinquencies, although 

past-due ratios are much lower than a decade ago. However, the Region’s banks holding the highest CRE loan 

concentrations are headquartered in large metropolitan 

areas that have experienced softening CRE markets, 

such as New York City and northern New Jersey. Moreover, banks with riskier business strategies may be more 

vulnerable during the downturn. Subprime lenders, in 

particular, are experiencing greater credit quality and 

earnings pressures, reflecting the weaker credit profile 

of subprime borrowers. 

Changes in the level and shape of the yield curve 

have implications for bank margins and interest rate 

risk management. During most of 2001, community 

bank funding costs declined to a lesser degree than did 

asset yields, in part because of deposit maturity schedules. Funding costs are poised to decline further as a 

large percentage of time deposits are scheduled to 

mature in the first half of 2002. Margins will likely rise 

in 2002, benefiting from a steeper yield curve, but competition may constrain margin improvement. Record 

mortgage refinancings in 2001 may increase concentrations of long-term assets, underscoring the importance 

of interest rate risk management, particularly for banks 

that focus on residential mortgage lending. 

3 Community banks are defined as insured institutions with total 

assets less than $1 billion. Regional banks are insured institutions 

with total assets between $1 and $10 billion. 

Regional Outlook—National Edition 20 First Quarter 2002 
Regional Perspectives
 

San Francisco Regional Perspectives
 

Softening demand for real estate, coupled with 

increased construction and development (C&D) loan 

concentrations, could challenge the Region’s construction lenders. In addition, community construction 

lenders headquartered in markets that are highly dependent on cyclical construction employment could see 

weakening in other segments of the loan portfolio. 

The economic downturn in high-tech areas adversely 

affected the Region’s office and industrial markets. 

The slowdown pushed up office vacancy rates in those 

metropolitan statistical areas (MSAs) with high exposures to the dot-com and semiconductor manufacturing industries. Several of these hightech-dependent markets, including San 

Francisco, San Jose, Seattle, Oakland, and 

Phoenix, also have experienced significant 

office space construction that has continued outstripped personal income growth significantthrough much of 2001. Many industrial prop­ ly over the past five years in several California 

erty markets have also seen softening. Of markets. Consequently, insured institutions with 

particular note, Sacramento experienced a C&D loan exposures that are lending in areas of 

significant increase in industrial vacancy rates rapidly deteriorating employment, or in markets 

and also had a relatively high proportion of with affordability pressures, could experience deteriindustrial space under construction. Slowed company relocation from the Bay Area and falling manufacturing employment adversely affected the outlook 

for industrial development in Sacramento. 

A steep decline in tourism following the September 

11 attacks further dampened hotel demand at several 

of the Region’s tourist destinations. For instance, the 

Bay Area, Las Vegas, and Phoenix markets reported 

above-average annual declines in revenue per available 

room for third-quarter 2001, as lower occupancies in the 

final days of September 2001 prompted aggressive 

room-rate cuts. The San Francisco MSA may be one of 

the more vulnerable areas given its depressed revenue, 

lower occupancy levels, and high relative volume of 

ongoing construction. Relatively robust hotel construction pipelines also characterized several other California MSAs. 

Consumer pressures have affected demand for retail 

space adversely. Net absorption of retail space was 

negative in the second and third quarters of 2001 in all 

of the Region’s major MSAs except Salt Lake City, 

as declines in consumer confidence and employment 

adversely affected retail sales. A considerable increase 

in the retail vacancy rate combined with a relatively significant volume of construction starts could challenge 

C&D lenders in certain high-growth retail markets, 

such as Las Vegas and Phoenix. Las Vegas experienced 

lower visitor volumes and tourism employment, while 

the Phoenix MSA shed high-tech-related jobs. 

Employment and affordability issues heighten residential construction concerns. Demand for real estate 

weakened in some Bay Area submarkets following a 

softening in the high-tech sector. Meanwhile, the 

Phoenix, San Diego, Sacramento, and Orange County 

apartment markets have experienced rising vacancies 

and are expected to face significant additions to stock. 

Many MSAs with significant exposure to the high-tech 

sector, as well as the Las Vegas market, have reported 

above-average annual increases in the unemployment 

rate, a development that could dampen demand for 

housing. Moreover, home price increases have 

orating C&D credit quality. 

Insured institutions that specialize in construction 

lending could be challenged by the decline in real 

estate demand. Median C&D loan-to-Tier 1 capital 

ratios were particularly high among community construction lenders based in the Provo, San Jose, Las 

Vegas, Oakland, Portland, Sacramento, Salt Lake 

City, Riverside, and Phoenix MSAs. Insured institutions headquartered in several of these markets reported relatively high C&D loan delinquency ratios as 

of third-quarter 2001. Lenders typically fund or 

defer interest payments on C&D loans, thereby avoiding borrower arrearages. Thus, C&D delinquencies 

could signal serious, unforeseen building delays or 

other difficulties. 

Lenders active in areas dependent on construction 

employment face additional challenges. Median C&D 

loan concentration levels tend to be greatest in markets 

with relatively high levels of construction employment. 

Consequently, if waning construction activity leads to 

employment declines, insured institutions active in markets such as Las Vegas, Riverside, Phoenix, Salt Lake 

City, and Santa Rosa could experience deterioration 

not only in C&D loans but in other segments of the loan 

portfolio as well. 

Regional Outlook—National Edition 21 First Quarter 2002 


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