Housing boom
brings risks,
FDIC says

Hawaii banks have a relatively
high exposure to mortgage-related
assets, compared with the mainland

Hawaii banks have relatively high exposure to mortgage-related assets, a situation that could hurt the institutions if the state's economy declines as interest rates rise, federal officials said yesterday.

Bank executives said they are aware of potential risks and are managing their portfolios with a careful eye on local economic trends.

Hawaii banks reported to the Federal Deposit Insurance Corp. on March 31 that mortgage-backed securities represented approximately 12.7 percent of their assets, compared with a national average of 2.8 percent.

Adjustable-rate mortgages constituted slightly more than 6 percent of assets, compared with a national average of less than 2 percent. And home equity loans made up slightly less than 4 percent of assets, compared with a national average of less than 0.6 percent.

While the bank insurance agency said the mortgage-backed securities "may provide geographic diversification," diminishing risk for the banks, it also warned that "high exposures to adjustable-rate mortgages and home equity lines may pressure credit quality if interest rate increases outstrip borrower repayment capacity."

The report reflects the growing reliance on adjustable rate loans by home buyers in Hawaii, where housing prices have risen sharply in the past year.

On Oahu, the median price of a single-family home reached $610,000 in May, a 37 percent increase from a year earlier. The FDIC has identified Honolulu as one of the nation's 55 "boom markets," or one in which inflation-adjusted home prices rose by at least 30 percent from 2001 to 2004.

As home prices have increased, buyers have increasingly relied on exotic mortgages to buy properties. According to the research firm LoanPerformance, one in four home purchasers in Hawaii so far this year relied on interest-only loans, which allow borrowers to pay only interest on their loans and make lower payments for the first several years. Likewise gaining in popularity are adjustable-rate mortgages, which also let buyers make lower monthly payments in the first several years.

The risk with both of these is that monthly payments increase later, and depending on interest rates, the bills could rise so much that buyers could not make the payments and lenders would be left with a bunch of bad loans.

John Gray, executive vice president and head of the mortgage banking division of Bank of Hawaii, said it's natural for Hawaiian financial institutions to be involved in real estate. "Real estate is really what the market here is all about," he said.

Gray said Bank of Hawaii is "comfortable with our mortgage exposure in both the pure credit portfolio and securities portfolio."

Gerry Keir, a spokesman for First Hawaiian Bank, said the bank's portfolio contains less exposure than the medians reported by the FDIC. First Hawaiian's mortgage-backed securities, for instance, make up just 5 percent of its assets and home equity loans less than 3 percent.

As for the bank's adjustable-rate mortgages, which are in line with the FDIC's numbers, Keir noted that most adjustable-rate loans have caps limiting how high the rates can increase, even if interest rates soar.

"It's not in our interest or the customer's interest to make loans that somebody won't be able to pay if interest rates go up," Keir said.

Gray said that despite soaring real estate prices, Hawaii buyers are bucking national trends. Average loan-to-value ratios, or how much people borrow against the value of a home, are among the nation's lowest, he said. And the FDIC noted that the strong Hawaii economy has fostered a decline in the median past-due loan ratio to 0.6 percent, compared with a national median of 1.5 percent.

Gray said three general types of Hawaii home buyers have contributed to this trend: young couples who have lived with family while saving for a down payment; homeowners who have built equity before trading up to a more expensive house; and West Coast investors who have sold properties in California and bought in Hawaii.

All of these buyers bring good credit ratings and significant equity, Gray said.

Rich Brown, chief economist with the FDIC in Washington, said the risk is that the local economy could contract, leading to fewer jobs and sagging wages, alongside a rise in interest rates.

But that's a scenario that local economists do not foresee.

The service and construction industries have driven job growth while tourists, influenced by the weak dollar and safety concerns, have flocked to the state. Hawaii's unemployment rate of 2.7 percent is the lowest in 14 years.

Earlier this month, the University of Hawaii Economic Research Organization forecast that job growth will slow in coming years as the tight labor market causes developers to hold off on projects rather than pay the high wages needed to attract workers.