Banks keeping mortgage rates artificially high, economists say

December 24, 2012 12:00PM

The Federal Reserve’s efforts to continue pushing mortgage rates lower have been stymied in part by banks, some of which are unable or unwilling to pass on cheaper rates to borrowers, the Wall Street Journal reported.

The Fed’s policy of quantitative easing, or buying mortgage-backed securities, has pushed rates on 30-year fixed-rate mortgages to generational lows. Last week’s rates were 3.37 percent, a drop of nearly three percentage points from when the policy went into effect four years ago, according to Freddie Mac.

Yet some economists believe that these rates should be even lower, but that in a quest for greater profits, banks are keeping them artificially high. Lenders profit from the spread between the cost of obtaining money and the rate they charge borrowers. The spread averaged around 0.5 percentage point before the 2008 financial crisis and increased to about 1 percentage point in subsequent years. The current spread is 1.3 points.

Quantitative easing is a centerpiece of the Fed’s stimulus efforts because it generally triggers a mortgage refinancing wave that allows homeowners to save hundreds of dollars in monthly payments and use that money for other purchases. But the banks’ resistance negates this, some economists say. “If you have lenders who are not passing through the savings, then more of the benefits of low rates are going to lenders,” said Thomas Lawler, an independent housing economist in Leesburg, Va.

Some banks, however, are saying that the increased fixed costs of doing business mean that the greater spreads simply enable them to make a fair rate of return. “”We have a different cost structure now,” said Stewart Larsen, who runs the mortgage banking division of Bank of the West.” – [WSJ] –Hiten Samtani