Fed flummoxed by mortgage gap
Record-low mortgage rates aren't cheap enough for Federal Reserve Chairman Ben Bernanke as he tries to spur economic growth and create jobs.
Policy makers are disappointed that lower yields on mortgage-backed securities haven't led to more savings on home loans after the Fed expanded its balance sheet to an all-time high of almost $3 trillion through bond purchases. Bernanke this month called the trend “unfortunate,” and the Federal Reserve Bank of New York held a workshop to examine the issue.
The gap between the bond yields and home-loan rates is blunting the economic benefits of the Fed's record accommodation, New York Fed President William C. Dudley said this month. Among the reasons for the spread: banks are reluctant to take on the expensive fixed costs of new staff to process the paperwork and tougher capital requirements are making it less attractive to service loans.
“The Fed is pushing really hard to try to get the mortgage rate down,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Conn. “There just doesn't seem to be much of an inclination on the part of banks to get out there and beat the bushes.”
Central bankers have been examining how to reduce the spread to increase the impact of their existing stimulus as options for further easing dwindle.
The Fed has kept its benchmark interest rate near zero since 2008. The central bank eased policy this month by saying the rate would stay low “at least as long” as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent.
The Fed expanded its quantitative easing program by adding $45 billion of Treasury security purchases each month to the $40 billion of monthly government-backed mortgage bond buying it began in September.
Bernanke's latest steps have helped make it cheaper to buy a home. The average fixed rate on new 30-year loans was 3.37 percent in the week ended Dec. 20, down from 3.55 percent on Sept. 13, the day the Fed announced its third round of bond buying.
That has left the spread, or difference, between so-called primary and secondary rates at about 1.1 percentage points, compared with less 0.7 percentage point in March and an average of about 0.5 percentage point in years before the credit crisis, according to data compiled by Bloomberg.
Lower mortgage rates have helped fuel a rebound in housing, the industry whose collapse sparked the financial crisis. Purchases of existing houses increased 5.9 percent in November to a 5.04 million annual rate, the most since November 2009, according to figures from the National Association of Realtors.
The median home price increased 10.1 percent to $180,600 from $164,000 in November 2011, the group said. Higher home prices are bolstering household finances, spurring the consumer spending that accounts for 70 percent of the economy.
The spread arises because lenders package home loans into bonds and sell them to investors, giving them fresh cash to make more loans. Lenders set aside a portion of the interest income to pay insurance premiums, and they keep another portion to service the debt.
Sales of government-backed mortgage securities now form the lifeblood of the home-loan market, with those guaranteed by taxpayer-supported Fannie Mae and Freddie Mac accounting for almost 70 percent.
Lenders say their existing staff must spend more time scrutinizing loans in the aftermath of the credit crisis, after being reminded how underwriting errors or incomplete documentation can expose them to being forced to repurchase soured debt. Bondholder claims that the mortgages backing Countrywide Financial Corp.'s securities never matched their promised quality led to a pending $8.5 billion settlement with parent company Bank of America Corp.
Bank of America, which has added about 5,000 mortgage- origination workers to the 18,000 it had 18 months ago, does quality checks on mortgages three times, CEO Brian T. Moynihan said at the Brookings Institution in Washington.
“We have to make sure the loan we originate is ironclad,” Moynihan said. “It's frustrating to me because we can't get our loans closed fast enough for our customers.”