The Federal Reserve Bank of Chicago's 42nd Annual Conference on Bank Structure and Competition was held on May 17–19, 2006. The theme of this year's conference was "Innovations in Real Estate Markets: Risks, Rewards, and the Role of Regulation." Over the past decade, the U.S. real estate sector has been an important engine for macroeconomic growth with innovations in home mortgage finance playing a central role. As the real estate markets have evolved, a number of public policy issues have arisen that require serious consideration.
Recent innovations in mortgage production methods have greatly enhanced household access to home mortgage credit. Coupled with historically low interest rates, these innovations have driven home ownership rates to all-time highs. Adjustable rate mortgage products have supplanted traditional fixed rate mortgages in many local markets, allowing households to leverage the long decline in mortgage rates into larger homes and/or greater disposable income. Similarly, more and cheaper refinancing options—especially cash-out options—have allowed consumers to unlock the equity value stored in their homes. These developments have supported consumer spending growth, which in turn dampened the most recent recession and fueled the recovery that followed.
However, some observers see dark economic clouds on the housing horizon as they believe that increases in home prices in coastal markets look like asset price bubbles. If and when these bubbles burst, the negative effect on wealth from falling home prices could slow economic growth. Speculative buying in especially hot housing markets could exacerbate these outcomes. Other observers worry about households' increased exposures to interest rate risk. As interest rates rise, they are concerned that delinquent payments and loan defaults could increase among homeowners, especially those who relied on adjustable rate mortgages to afford their homes. If these potential events were to unfold together, a worst-case scenario could put stress on the huge mortgage portfolios held by housing government sponsored enterprises, with potential systemic effects for financial markets.
These ongoing changes have important implications for the structure and performance of the financial industry, for innovation and risk in the financial system, and for macroeconomic growth and stability. To consider these issues we gathered some of the most qualified and respected members of the financial community. The discussion began on Thursday with a keynote address by Federal Reserve Board Chairman Ben S. Bernanke. This was one of the first opportunities for the new Chairman to present his views on regulatory policy, and we were pleased to have him participate. We were also fortunate to have Robert Shiller, Stanley B. Resor Professor of Economics at Yale University—known for his analysis and explication of speculative pricing bubbles—deliver the keynote address to open the proceedings on Friday. And we were especially fortunate to have luncheon addresses from Ken Thompson, Chairman, President, and Chief Executive Officer, Wachovia Corporation, and John Dugan, Comptroller of the Currency.
The conference hosted an impressive group of experts on Thursday and Friday. On Thursday we explored the conference theme in depth in a morning panel discussion. On Thursday afternoon, we discussed recent trends in real estate markets and targeted lending activity. On Friday, we strayed from the discussion of real estate topics to debate a timely financial issue facing banks: the preemption of state banking laws.
Michael H. Moskow
President and Chief Executive Officer
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