agreed that housing valuations seemed to be substantially higher than warranted by fundamentals. however, home prices at the national level are now 18 percent off their peak, with some states, such as california and florida, experiencing declines on the order of 40 percent. 1 these declines may have reversed much, or perhaps all, of the earlier overvaluation. that said, futures markets and many analysts foresee further declines. expectations that house price declines have not yet reached their trough are probably deterring some prospective homeowners from making purchases and thereby contributing to the current weakness in housing demand. a key factor inhibiting recovery is that the adverse conditions in the housing and mortgage markets have been, and continue to be, mutually reinforcing. as i am sure you are painfully aware, delinquencies on mortgages have risen sharply in recent years. by way of background, the problems began in the nonprime mortgage market. as house prices boomed in the middle part of this decade, mortgage originators relaxed underwriting standards and extended mortgages with low or no down payments to households with weak credit histories or those that did not fully document their income. many of these loans had low initial interest rates that reset to market rates after a couple of years, which resulted in a significant increase in the monthly payment. had house prices continued to rise, many borrowers would have been able to refinance to avoid higher payments and perhaps to extract accumulated home equity to use for future payments. however, the downturn in house prices meant that many borrowers did not have sufficient equity to refinance. payment problems began to rise, figures based on data from loanperformance, a division of first american corelogic. which, in turn, led lenders to tighten standards and made it even more difficult for borrowers to obtain new loans, which put even more upward pressure on delinquencies. eventually, investors became unwilling to fund higher - risk mortgages at any price. although the current problems appear to be rooted in high - risk subprime lending, i would like to dispel the notion that these problems were caused in any way by community reinvestment act ( cra ) lending. the cra is designed to promote lending in low - to moderate - income areas ; it is not designed to encourage high - risk lending or poor underwriting. our analysis of the data finds no evidence, in fact, that cra lending is in any way responsible for the current

focussed on the key risk management processes, it would sharply reduce routine supervisory umbrella presence in holding companies. as the committee knows, the board has recently published for comment proposals to expedite the applications process, and the legislation congress enacted last year eased such procedures as well. nonetheless, the board requests even greater modification to its existing statutory mandate so that the required applications process could be sharply cut back, particularly in the area of nonbank financial services. in the board ’ s view, those entities interested in banks are really interested in access to the safety net, since it is far easier to engage in the nonsafety net activities of banks without acquiring a bank. if an organization chooses to deliver some of its services with the aid of the sovereign credit by acquiring a bank, it should not be excused from efforts of the government to look out for the stability of the overall financial system. for bank holding companies, this implies umbrella supervision. although that process will increasingly be designed to reduce supervisory presence and be as nonintrusive as possible, umbrella supervision should not be eliminated, but recognized for what it is : the cost of obtaining a subsidy. nonetheless, we would hope that should the congress authorize wider activities for financial services holding companies that it recognize that a bank which is a minor part of such an organization ( and its associated safety net ) can be protected through adequate bank capital requirements and the application of sections 23a and 23b of the federal reserve act. the case is weak, in our judgment, for umbrella supervision of a holding company in which the bank is not the dominant unit and is not large enough to induce systemic problems should it fail. subsidiaries, subsidies, and safety nets the members of this subcommittee are, i think, aware of the board ’ s concerns that the safety net constructed for banks inherently contains a subsidy, that conducting new activities in subsidiaries of banks will inadvertently extend that subsidy, and that extension of any subsidy is undesirable. the subcommittee recently heard testimony that there is no net subsidy and, therefore, the authorization of nonbank activities in bank subsidiaries would neither inadvertently extend this undesirable side effect of the safety net nor reduce the importance of the holding company as a consequence of the increased incentives to shift activities from the holding company to the bank. mr. chairman, i would like briefly to comment on these latter views. subsidy values - - net or gross - - vary from bank to bank ; riskier banks clearly get a larger subsidy from the safety