, 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 last year, the federal bank regulatory agencies issued draft guidance on both residential and commercial mortgage lending.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

current level. therefore, banks should not be surprised by the emphasis in the proposed cre guidance on concentrations and the importance of portfolio risk management. historically, cre has been a highly volatile asset class. in the past, problems in cre, even at wellmanaged banks, have generally come at times when the broader market was encountering difficulties. in an effort to generate cash flow, borrowers and bankers with properties in distress may disrupt their local real estate market by cutting rents or offering leasehold improvements and other incentives to attract or keep tenants. these actions can have a negative effect on the entire local real estate market, including good projects. in most years, cre credit losses are relatively low compared with many other types of bank loans. but in times of stress, the loss rate can jump considerably higher. because cre losses tend to be greater during times of stress, bankers must focus more intently on their risk appetite as their cre concentration grows. bankers must consider how much capital will be placed at risk if the cre portfolio hits a stress period and compare that loss exposure with the relative returns of cre lending. in other words, bankers need to practice risk management. while banks'underwriting standards are generally stronger than they were in the 1980s and 1990s, the agencies are proposing the guidance now to reinforce sound portfolio - management principles that a bank should have in place when pursuing a commercial real estate lending strategy. a bank should be monitoring performance both on an individual - loan basis as well as on a collective basis for loans collateralized by similar property types or in the same markets. some institutions'strategic - and capital - planning processes may not adequately acknowledge the risks from their cre concentrations. cre lending in recent years has occurred under fairly benign credit conditions, but those conditions are unlikely to continue indefinitely. the ability of banks with significant concentrations to weather difficult market conditions will depend heavily on their riskmanagement processes and their level of capitalization. from a risk - management and capital perspective, institutions should generally focus on the emerging conditions in their real estate markets and on the potential cumulative impact on their portfolios if conditions deteriorate ; they should also take other measures to help identify cre vulnerabilities. of course, these measures should vary according to the size of the organization and the level of the concentration. all of these steps are key elements of a sound strategy to manage concentrations. while supervisors continue to underscore the importance of having robust risk - management practices for