those investors had intended. the result was a change in the value of existing contracts and a period of market adjustment as new restructuring clauses were developed and implemented. of course, we should not want to prevent rapid price changes or changes in investment flows, as such changes may be appropriate as new information about fundamentals emerges. and the occurrence of glitches in new markets and institutions need not reflect policy failures or provide evidence that an innovation is undesirable. preventing all such occurrences would probably require us to stop all innovation. but neither is it desirable that growing pains in one market or at a few institutions spill over so strongly that the financial system as a whole could be destabilized. a middle way in regulation policymakers have a range of strategies available for dealing with innovation. at one extreme, in theory we could take a completely hands - off approach, allowing new financial markets and instruments to develop without restrictions and indeed without any scrutiny, trusting private market participants to do everything necessary for stability and efficiency. at the other extreme, policymakers theoretically might be quite heavy - handed, either imposing regulations on virtually every market and instrument to stop any innovations that, in their judgment, could cause harm or, conversely, actively fostering or subsidizing innovations seen as desirable. obviously, these are extreme positions, and i do not know of any practicing policymaker who seriously wants to pursue either extreme course. today i wish to argue for a middle ground in which markets are allowed to work and develop and in which policymakers work hard to understand new developments and to help market participants see the need for improvements where appropriate. in my view, regulations should be imposed only when market participants do not have the incentive or the capability to effectively manage the risks created by financial innovation. for example, explicit or implicit subsidies of some institutions could limit market discipline of their risk - taking, leading to a concentration of risk so large that even the most sophisticated institutions would find it next to impossible to manage the risk under stressful circumstances. or policymakers may be concerned that some potential parties to innovative contracts, especially in the retail arena, are insufficiently knowledgeable to understand or manage the associated risks. i believe such instances are rare. making a case for early regulatory intervention is particularly difficult when the private parties involved in an innovation are sophisticated because, in many cases, they will be the first to recognize possible problems and will have strong incentives to fix them and also to protect themselves against fraud or unfair dealing. so how should

in the market has not proceeded at a uniform pace, but on net it has been dramatic. about 7 - 1 / 2 million first - lien subprime mortgages are now outstanding, accounting for about 14 percent of all first - lien mortgages. 1 so - called near - prime loans – loans to borrowers who typically have higher credit scores than subprime borrowers but whose applications may have other higher - risk aspects – account for an additional 8 to 10 percent of mortgages. 2 the expansion of subprime mortgage lending has made homeownership possible for households that in the past might not have qualified for a mortgage and has thereby contributed to the rise in the homeownership rate since the mid - 1990s. in 2006, 69 percent of households owned their homes ; in 1995, 65 percent did. the increase in homeownership has been broadly based, but minority households and households in lower - income census tracts have recorded some of the largest gains in percentage terms. not only the new homeowners but also their communities have benefited from these trends. studies point to various ways in which homeownership helps strengthen neighborhoods. for example, homeowners are more likely than renters to maintain their properties and to participate in civic organizations. homeownership has also helped many families build wealth, and accumulated this estimate is based on data from the mortgage bankers association, adjusted to reflect the limited coverage of the association ’ s sample. near - prime loans include those securitized in " alt - a " pools and similar loans that are held on lenders ’ books. home equity may serve as a financial reserve that can be tapped as needed at a lower cost than most other forms of credit. broader access to mortgage credit is not without its downside, however. not surprisingly, in light of their weaker credit histories and financial conditions, subprime borrowers face higher costs of borrowing than prime borrowers do and are more likely to default than prime borrowers are. for borrowers, the consequences of defaulting can be severe – possibly including foreclosure, the loss of accumulated home equity, and reduced access to credit. their neighbors may suffer as well, as geographically concentrated foreclosures tend to reduce property values in the surrounding area. the recent problems in the subprime mortgage sector with this background in mind, i turn now to the recent problems in the subprime mortgage sector. in general, mortgage credit quality has been