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 in a speech in New York 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, 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 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.
At the same Dec. 11-12 meeting, 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, 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.
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.
"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.
Sales of government-backed mortgage securities now form the lifeblood of the home-loan market, representing about 90 percent of originations, with those guaranteed by taxpayer-supported Fannie Mae and Freddie Mac accounting for almost 70 percent.
Total originations may rise 21.6 percent this year to $1.75 trillion, the highest since 2009, amid a 33.9 percent gain in refinancing to $1.25 trillion, according to Washington-based Mortgage Bankers Association.
"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.
One reason mortgage rates aren't falling more: Fannie and Freddie, under pressure from their regulator to behave more like private firms, have raised their annual insurance premiums by an average of 0.2 percentage point since April.
For 30-year loans at large lenders, the premiums have increased by about 0.25 percentage point, Garry Cipponeri, a senior vice president at JPMorgan Chase & Co.'s second-ranked home-loan unit, said at a Dec. 6 conference in New York. Mortgage rates have climbed to cover those costs, he said.
Tighter regulation may also be to blame. Prices for contracts to service loans have fallen since last year, when the Basel Committee on Banking Supervision drafted rules requiring banks with concentrations in these assets to hold more capital.
With lenders making less money creating service contracts, they must charge more on home loans. The Fed, as regulator for banks, enforces the capital requirements in the U.S.
"The Fed has been taking the capacity out of the market by punishing people that own large portfolios of servicing contracts," Paul Miller, managing director at brokerage FBR Capital Markets, said in a telephone interview.
Andrea Priest, a spokeswoman for the New York Fed, declined to comment.
At the same time, staff shortages make it harder for banks to make more home loans, limiting supply and keeping mortgage rates higher than they otherwise would be.
Banks are reluctant to hire because they know that record- low borrowing costs can't last, said David Cannon, global co- head of mortgage trading at Royal Bank of Scotland Plc's securities arm.
"Everyone knows rates are going to go higher eventually," Cannon said in an interview at the unit's offices in Stamford, Connecticut.
It's also tough to find and train workers, and harder for new mortgage companies to gain approval to enter the business as oversight becomes more stringent in the wake of the financial crisis, said Willie Newman, head of Taylor Capital Group Inc.'s home-loan unit, which originated $1.4 billion of mortgages last quarter.
U.S.-backed mortgages still account for about 90 percent of new lending and Fannie Mae and Ginnie Mae are seeking to protect taxpayers as new originators apply to do business with them. Fannie Mae has begun limiting how many loans it will guarantee annually or buy from certain firms. Ginnie Mae has gotten tougher this year about approving lenders even as it's signed up about 50, Ginnie Mae President Ted Tozer said in an October interview.
To handle higher demand, Newman's Ann Arbor, Michigan-based unit started running night shifts employing 30 to 45 part- timers, mostly college students and graduates from the three universities in its area. The eight-month-old effort also helps groom full-time workers, he said.
"We're really happy with how the program's gone and anticipate expanding it next year," Newman said.
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 roughly 18,000 it had 18 months ago, does quality checks on mortgages three times, Chief Executive Officer Brian T. Moynihan said Dec. 14 in response to questions after a speech 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."
To reduce the yield spread, the Fed can "encourage good policy" that "will reduce the perceived risk and cost to the banks in making mortgage loans," Bernanke said at a Dec. 12 press conference in Washington. Policy makers could take steps to limit banks' concerns that they could be forced to buy back loans after defaults, he said.
Relief may be in sight. Next year, home-loan volumes are projected by Mortgage Bankers Association to decline 23 percent because a lot of the refinancing activity has already occurred, potentially providing lenders with more resources and reason to compete in ways that would narrow the gap in yields between mortgage-backed securities and home loans.
Still, Fannie Mae and Freddie Mac's regulator is at the same time pledging further increases in their guarantee fees that would expand the spread.
Bernanke says he's optimistic retail borrowers will get the "full benefit," or "most of the benefit," of the Fed's mortgage-buying.
"It does seem to be the case that, over a period of time — not immediately, but over a period of time — most of the declines in MBS yields do find their way through to mortgage customers and, thereby, strengthen the housing market," he said.