The market fallout from the mounting subprime mortgage crisis has been a punishment for poor lending and investment practices, said William Poole, the president of the Federal Reserve Bank of St. Louis.
His prepared remarks to the St. Louis Association of Real Estate Professionals dealt a rebuke to market players caught on the wrong side of deals tied to the ailing subprime market.
"Financial markets have dealt harshly, but on the whole appropriately, with banks, hedge funds, and certain other investors who were heavily exposed to the riskiest segments of the nonprime securitized mortgage market," Mr. Poole said Friday.
The Federal Reserve Board's communications over the past two years were adequate signals to investors and lenders alike of the sustained period of rate hikes, he said. As a result, market players must have anticipated rising interest rates and the impact that may have on the deals being underwritten on instruments such as adjustable-rate mortgages.
"I find it odd that apparently sophisticated investors in nonprime mortgage-backed securities now claim surprise that many nonprime ARM borrowers are facing payment shock because of the increase in short-term interest rates over the past few years," Mr. Poole said. He is a voting member of the Federal Open Market Committee, which resolved yet again late last month to hold the target interest rate at 5.25%.
Mr. Poole expressed concern for borrowers struggling to cope with payments, and he reiterated that the Fed is monitoring the situation carefully. In addition, he outlined its consumer protection initiatives to improve borrower education and counseling.
"A better-functioning market will require lenders who are better informed about borrowers' capacity to service debt and borrowers who are better informed about the commitments they are making," he said.
