der Euro/Dollar Long Thread

Rise in interest rates will put pressure on California, regulators say
Date: 2005/Jan/06 03:20 AM

Jan. 6--Federal banking regulators are keeping an extra-sharp eye on California this year to see what impact rising interest rates have on the state's economy and its banking sector.

The reason: If short-term interest rates continue to rise, as the Federal Reserve made clear earlier this week they probably will, the higher borrowing costs will "affect the state disproportionately" because of California's appetite for variable-rate loans.

With its high house prices and low affordability rate, Orange County is one of the regions in the state where adjustable-rate mortgages are especially popular. This September, a record 79 percent of local homebuyers used ARMs, according to an industry group.

"To the extent that California borrowers tend to be more heavy users of adjustable-rate product, there's more vulnerability there," said Richard Brown, the chief economist for the Federal Deposit Insurance Corporation because as rates rise it will not only crimp consumer spending but also make it harder for borrowers to make their monthly payments.

"Ultimately it could have a negative effect," said Catherine Phillips-Olsen, the regional manager of the FDIC's San Francisco office, which oversees banking in 12 western states.

In its quarterly analysis of the economic and banking conditions in the 50 states and the District of Columbia, the FDIC said California's economy did well in 2004 and the financial performance of banks and thrifts here was "solid."

But the FDIC said lenders here were particularly exposed to the housing sector because of the role that construction and development lending plays in their business.