, and delinquencies on commercial mortgage - backed securities have reversed the modest increase that occurred from 2000 to 2003. the latest information on property prices hints at some moderation in price increases in the first quarter from the rapid price appreciation of last year. but, as in the housing market, commercial real estate prices are continuing to rise in the aggregate. recent supervisory guidance relating to real estate lending the federal reserve will continue to monitor developments in the residential and commercial real estate markets very closely. in addition to scrutinizing the effect of these developments on the economy, we are also, in our role as bank supervisors, monitoring banks'mortgage lending practices. last year, the federal bank regulatory agencies issued draft guidance on both residential and commercial mortgage lending. the agencies have received many comments on the proposed guidance, including comments from your association, which we will consider as we discuss what steps to take next. i will address the guidance on residential mortgage lending first. nontraditional mortgage products over the past few years, the agencies have observed an increase in the number of residential mortgage loans that allow borrowers to defer repayment of principal and, sometimes, interest. these loans, often referred to as nontraditional mortgage loans, include interest - only ( io ) mortgage loans, for which the borrower pays no loan principal for the first few years of the loan, and payment - option adjustable - rate mortgages ( option arms ), for which the borrower has flexible payment options - and which could result in negative amortization. ios and option arms are estimated to have accounted for almost one - third of all u. s. mortgage originations in 2005, compared with fewer than 10 percent in 2003. despite their recent growth, however, it is estimated that these products still account for less than 20 percent of aggregate domestic mortgages outstanding of nearly $ 9 trillion. although the credit quality of residential mortgages generally remains strong, the federal reserve and the other banking supervisors are concerned that banks'current risk - management techniques may not fully address the level of risk inherent in nontraditional mortgages, a risk that would be heightened by a downturn in the housing market. mortgages with some of the characteristics of nontraditional mortgage products have been available for many years ; however, they have historically been offered to higher - income borrowers. more recently, nontraditional mortgages have been offered to a wider spectrum of consumers, including subprime borrowers, who may be less suited

federal reserve will do all that it can to prevent fraud and abusive mortgage lending practices. however, any new rules should be drawn clearly to avoid creating legal or regulatory uncertainty that could have the unintended consequence of restricting consumers'access to responsible subprime credit. another area of possible financial risk that we are watching is leveraged lending. 8 business borrowing for mergers and acquisitions and for corporate refinancing has been quite robust over the past few years as firms have taken advantage of relatively low interest rates to reduce their cost of capital. as underwriters have brought these deals to the market, the good earnings of corporate borrowers and several years of very low defaults have encouraged lenders and investors to fund hundreds of billions of dollars in leveraged loans. however, with this growth we are seeing some trends in the leveraged loan market that warrant closer monitoring : deals continue to be structured with thin pricing, more leverage, and looser covenants than is typical for non - investment - grade borrowers. further, originating banks are capitalizing on the strong investor demand for these loans by underwriting to distribute them, including board of governors of the federal reserve system ( 2007 ), “ the april 2007 senior loan officer opinion survey on bank lending practices, ” may, www. federalreserve. gov / boarddocs / snloansurvey / 200705. board of governors of the federal reserve system, federal deposit insurance corporation, national credit union administration, office of the comptroller of the currency, and office of thrift supervision ( 2007 ), " federal regulators encourage institutions to work with mortgage borrowers who are unable to make their payments, " press release, april 17, www. federalreserve. gov / boarddocs / press / bcreg / 2007 / 20070417. board of governors of the federal reserve system, federal deposit insurance corporation, national credit union administration, office of the comptroller of the currency, and office of thrift supervision ( 2007 ), " agencies seek comment on subprime mortgage lending statement, " press release, march 2, www. federalreserve. gov / boarddocs / press / bcreg / 2007 / 20070302. randall s. kroszner ( 2007 ), “ creating more effective consumer credit disclosures, ” speech delivered at the george washington university school of business, financial services research program policy forum, washington, june 1, www.