By Caroline Salas Gage, Jody Shenn and Heather Perlberg
Record-low mortgage rates aren’t cheap enough for Federal Reserve Chairman Ben S. Bernanke.
Bloomberg reports that the Fed is buying $45 billion of Treasuries and $40 billion of mortgage-backed securities each month and central bankers are disappointed that their third round of quantitative easing hasn’t led to more savings for consumers on home loans.
Bernanke this month called the trend “unfortunate,” and the Federal Reserve Bank of New York held a workshop to examine the issue.
The reason the Fed’s stimulus hasn’t led to even cheaper borrowing costs for consumers is the spread between mortgage-bond yields and home-loan rates is wider than usual. That’s partly because 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 yield gap is blunting the economic benefits of the Fed’s record accommodation, New York Fed President William C. Dudley said in a speech in New York this month.
“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, Connecticut. “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 they run out of options for further easing.
The Fed has kept its benchmark interest rate near zero since 2008 and this month eased policy 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.
At the same Dec. 11-12 meeting, the Fed expanded its quantitative easing program by adding the Treasury purchases to the 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, according to Freddie Mac data.
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.
“It is imperative that the key channels of the monetary policy transmission mechanism are operating as effectively as possible,” Dudley said in Dec. 3 remarks in New York. “To the extent that the primary-secondary rate spread widens, the reduction in pass-through limits the full impact of the policy actions.”
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.
“Under any other historic circumstances, a wide spread had been enough to cause lenders to modify their rate sheets lower to increase volume,” Merrill Ross, an analyst with Baltimore- based Wunderlich Securities Inc., said in a report last week.