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Central Banker - Summer 2008

Central Banker - Summer 2008

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Published by: Federal Reserve Bank of St. Louis on Aug 13, 2010
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Summer 2008
News and Views for Eighth District Bankers
By Michelle Neely
Eighth District banks and their national peerscontinue to ace pressure on earnings amid ris-ing asset quality problems and weakness in theregional and national economies. First-quarter results illustrate these pressures, yet indicatethat banks in the District have been remarkablyresilient thus ar.Return on average assets (ROA) increasedslightly in the rst quarter at District banks. Theyposted an average ROA o 0.96 percent comparedwith 0.94 percent at year-end 2007. The District’srst-quarter perormance substantially exceededthat o U.S. peer banks (banks with averageassets o less than $15 billion), which, as a group,recorded an average ROA o 0.81 percent. ROAor both sets o banks is down markedly rom year-ago levels, though the drop at peer banks ismore substantial at 36 basis points.
Dstrct Banks: Profts Steady, But Problem Loans Mount
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What We’re Learning fromthe Subprime Mortgage Crisis
St. Louis Fed’s CheckRestructuring Speeds Up
 The Past, Present andFuture of the U.S.Mortgage Market
Housing and the ‘R’ Word
Central Banker 
CoverageIs Expanding Online
Subscribe to
Central Banker 
New Presdent Bullard Bullsh on Economcs
continued on Page 4
oo oten, says new St. Louis Fed President Jim Bullard, economics is regarded as amere college subject.“Many people think economics is too com-plicated. Not everyone goes to college; so,not everyone gets it—even though they livewith the consequences o supply and demandevery day,” Bullard says. “We live in a marketsystem, and people need to understand how thatsystem works.Bullard, who succeeded Bill Poole as presi-dent April 1, is an advocate o the power o eco-nomic ideas and nancial literacy. He pursuedthose ideals through 18 years o study in theSt. Louis Fed’s Research division, as well asthrough proessional associations and speakingengagements. Since joining the Fed, Bullardhas already spread this message to many groupsin the Eighth District.He’s also well-versed on monetary policy, hav-ing worked closely with Poole on briengs beoreeach Federal Open Market Committee meeting.Bullards expertise in monetary policy and amil-iarity with FOMC procedures are among themany reasons why he was tapped or the job.“I’ve seen many o the events o the recent yearsrom the inside out, including the Asian cur-rency crisis, the bursting o the tech bubble andthe S&L predicament. By intimately knowingmonetary policy, I’m not coming in cold duringa time when the situation is very tense,” he says.“It’s actually the most tense it’s been since 1980.The key thing or commercial bankers to keepin mind, Bullard says, is that the U.S. economy isresilient and has weathered many shocks over the years. “We’ll get through this one as well. Theeconomy continues to surprise at how it adaptsand comes back,” he says.Bullard, 47, wasappointed presidentby the St. Louis Fed’sBoard o Directors ater an extensive search andwas approved by theFed’s Board o Gov-ernors. To read Bul-lard’s ull biography, seewww.stlouised.org/news/press_room/bios.html#bullard.
What We’re Learning fromthe Subprime Mortgage Crisis
By Bob Schenk, senior vice president, Public and Community Affairs
ew public policy issues have burst onto theAmerican scene so rapidly and with suchintensity as the subprime mortgage crisis.Over the past several months, we have seen an ever expanding quagmire o those caught up by suchcausal actors as poor underwriting standards, inac-curate nancial inormation, over-speculation in avery hot real estate market or simply people assum-ing new nancial obligations or which they werenot adequately prepared.In addition to the widespread media coverage,there has been an unprecedented response by a widevariety o ederal, state and local agencies, as well asinnumerable social service and nonprot organiza-tions. Yet, we continue to hear and see advertisingand marketing campaigns striving to lure prospec-tive homeowners with teaser rates, promises o 100percent nancing or pledges to overlook poor credit.While the dream o homeownership is one o thestrongest threads in the abric o American society,the latest tear refects a crisis beyond the currentissues in the mortgage and credit markets. What isapparent is the continuing lack o nancial educa-tion at all levels o society and o eorts to addressissues related to household nances and personalnancial literacy.However, the Federal Reserve System is helpinghomeowners, prospective buyers, bankers, com-munity groups and related organizations get a better handle on understanding the myriad issues o sub-prime and oreclosure.In the Eighth District, we’re providing moreinormation and knowledge about these issues tobankers, lenders and consumers through a varietyo briengs, speeches and Bank publications. InSt. Louis, we partnered with a local agency toconvene nearly 60 dierent organizations workingtogether to share resources and knowledge. Wehave dozens o additional public orums scheduledin the coming months to address mortgage issues.We also have a Foreclosure Resources web site(www.stlouised.org/nancial/oreclosure_n.html),which includes a section dedicated to nancialinstitutions and lenders. It contains some o our lat-est mortgage and oreclosure research; several years’worth o articles rom our publications, including
Central Banker;
news on pending regulations, orumsand tools; as well as links or consumers and com-munity groups. Zone-specic inormation is alsoavailable or Louisville and Little Rock. (Memphiswill be added soon.)Over the coming months and years, the St. LouisFed will continue to muster resources to provideleadership on subprime and oreclosure issues (aswell as on a wide variety o other District andnational issues) and to oster nancial literacy andeconomic education as the underpinnings o our community outreach.
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Check volumes are continuing to decline at asignicant rate as people are increasingly switch-ing to electronic orms o payment. A recentreview by the Federal Reserve’s Retail PaymentsOce determined that the scheduled consolida-tions o St. Louis Fed Check operations withthose at other Feds needs to happen sooner.
St. Louis ofce:
Previously, St. Louis Checkoperations were going to be consolidated withthe Atlanta Fed in the rst quarter o 2011. Thiswill now take place in the ourth quarter o 2009.Treasury check and postal money orders willcontinue to be processed in St. Louis ater 2009.
Memphis ofce:
Ater the city ne-sortdeposit deadline on Friday, July 18, 2008,Memphis will no longer accept paper checks or processing. Instead, they will be delivered to theAtlanta oce. Memphis and Little Rock cus-tomers should drop o their work at their respec-tive transit points or transportation to Atlanta.I you have questions or concerns regard-ing the consolidation, call Sales Support at513-455-4242.
St. Lous Fed’s Check Restructurng Speeds Up
    F   r   a   c   t    i   o   n   o    f    M   a   r    k   e   t
0%25%50%75%100%2001 2003 2005 200720092008
Home-Equity Lines/LoansAlt-ASubprimeJumboConventional/ConformingFHA/VA
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By William R. Emmons
he U.S. mortgage market evolved throughseveral distinct phases to reach its cur-rent status as the largest, most innovativeand most complex home-nancing market in theworld. Broadly, there were ve major eras duringthe last century. How the mortgage market evolvesduring the next ew years depends in large part onwhether the private-label mortgage-backed securi-ties (MBS) market recovers and on the extent andnature o any potential ederal government inter-ventions into housing and mortgage markets.
The pregovernment era.
Beore the GreatDepression, the mortgage market was strictly a pri-vate aair. There was no ederal deposit insuranceor ederal regulation o mortgage lending. Thehomeownership rate was below 50 percent. Mort-gage down-payment requirements o 50 percentwere typical. Most mortgage loans were short-term, sometimes as short as ve years, and were setup as balloon mortgages. Homeownership was nota viable option or most households.
The era o the Great Depression.
The GreatDepression damaged the entire nancial system,especially the mortgage sector. By 1934, themortgage-delinquency rate was about 50 percentnationwide, as banks, thrits and mortgage lend-ers ailed. The ederal government respondedby creating a host o regulations and institutions.Included were greater ederal supervision o mort-gage lending and depository institutions; ederaldeposit insurance; the Federal Housing Admin-istration (FHA); the Federal Home Loan BankSystem (FHLBS); the now-deunct Home Owners’Loan Corp. (HOLC); the Reconstruction FinanceCorp. (RFC); and the Federal National MortgageAssociation (Fannie Mae).
The era o ederally insured depository insti-tutions.
Increased ederal supervision and theintroduction o ederal deposit insurance greatlystrengthened banks and thrits. These depositoryinstitutions came to dominate mortgage lendingater World War II, achieving a combined mort-gage-market share o 75 percent by 1973. Thepredominant loan type became the long-term,sel-amortizing, xed-rate mortgage that was cre-ated by the FHLBS. The Veterans Administrationand FHA guaranteed mortgages or a large number o households, contributing to a rising homeown-ership rate, which reached 64 percent by 1970.
The era o the GSEs and secondary markets.
 The key vulnerabilities o depository institutionswere exposure to high deault rates in local marketsand an interest-rate mismatch between short-termdeposits and long-term xed-rate mortgages. Animportant policy response to these weaknesses wasthe creation o two government-sponsored
The Past, Present and Future o the U.S.
SOurce: Atho’s allations and oast (o 2008 and 2009)
Morte Orntons by Product Type

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