Third, the boom was fueled by new financial products, such as collateralized debt obligations that were backed by subprime and Alt-A mortgages. Investors misunderstood how risky these products were and this resulted in lower mortgage rates for non-conforming residential mortgages and lower funding costs for commercial real estate borrowing. In the housing sector, these factors interacted to create a strong reinforcing dynamic. The relaxation of underwriting standards that made it easier to become a homeowner and the low mortgage rates – supported in part by the new financial products – made it easier to speculate in real estate. Moreover, as home prices rose, household net worth increased, making households more willing to consume a greater share of their current income. Not surprisingly, this bout of speculative fever ended badly. Eventually, the supply of houses caught up with and then vastly overshot demand. Easing underwriting standards to support demand could only go on for so long. Prices turned down. At the national level, home prices peaked in late 2005 to early 2006 with commercial real estate prices peaking about one year later (Chart 8). From those peaks, home prices have fallen by about 30 percent on average, with much larger declines in some areas, while commercial real estate prices have fallen by about 40 percent on average. As price declines intensified, the number of serious mortgage delinquencies surged and, in fact, continue to rise (Chart 9).
Christian Noyer: A central banker’s personal perspective on hedge funds Introductory speech by Mr Christian Noyer, Governor of the Bank of France, at Conference on hedge funds, Washington DC, 15 April 2007. *  *  *  Thank you all for coming. It's a pleasure and a privilege to have you all here to day. Special thanks to the IMF and John Lipsky for organizing this event for us and with us. The purpose of our meeting is to present the special issue of our Financial Stability Review on hedge funds. So I want to say a few words on why we embarked on such a project and how we did it. As you noticed, this issue of our Review is mostly based on external contributions. Some authors are with me to day and I also want to thank them. We are very happy that we could assemble such an eminent roster of contributors. Let me say from the outset that we did not intend to reach a conclusion at this stage. The international community is working on this issue, in particular in the framework of the FSF. The main question is: how can we best reconcile keeping the positive inputs of this activity for financial markets functioning and innovation, while keeping the risks that may be generated for financial stability to a minimum. This is why there is a debate on hedge funds, which we think, is legitimate.