Lack of competition in the mortgage industry is hindering the affects of the Federal Reserve’s quantitative easing efforts, a senior Fed policy maker said.
In testimony to the National Association for Business Economics in New York City Monday, New York Fed President Bill Dudley said the “concentration of mortgage origination volumes at a few key financial institutions” shows banks are not passing savings from lower interest rates on to their borrowers.
Many reports have shown, in fact, that since the financial crisis fewer banks are arranging mortgages. Last week both Wells Fargo and JPMorgan Chase posted record profits, crediting an increase in new and refinanced mortgages. Those profits can also be attributed to a greater share of the mortgage market. Wells Fargo, in fact, now originates about one third of all new mortgages in the U.S. As in any industry, less competition leads to higher consumer costs.
Dudley emphasized the need for officials to find ways to “foster competition in mortgage origination to ensure a more complete pass-through of low secondary mortgage rates to households.” He pointed out the Fed’s third round of quantitative easing—an open-ended $40 billion per month purchase of mortgage-backed securities—has, as expected, reduced interest rates in the capital market, but interest rates on new home loans have remained flat. According to Dudley, the two rates should mirror one another, as banks generally package new mortgages into securities before selling them to investors.
But, Dudley said, concentration in the mortgage market is only partly to blame. Fannie Mae- and Freddie Mac-required warranties, which can force banks to buy back loans should they default, has also hindered new mortgage activity among banks. The constant threats, he said, “discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere.”
Fannie and Freddie further hamper growth in the mortgage market, he said, by charging higher guarantee fees, which increased 10 basis points in April to support a payroll tax cut, and will again jump in November in an effort to make the two lending giants price mortgages in line with their associated risks.
Still, Dudley voiced his continued support of the Fed’s monetary policy given the economic environment. He explained risks associated with the Fed’s monetary policy measures are minor when compared to an unsustainable economic recovery.
“While the costs are real and need to be carefully evaluated, they pale relative to the costs of not achieving a sustainable economic recovery,” Dudley said. “A failure in that regard would lead to widespread chronic unemployment. Long term unemployment will eventually lead to permanent atrophying of skills that will restrain the economys growth potential.”
Likewise, although Dudley emphasized his favor of “aggressive monetary policy given the current situation,” he stressed his belief that monetary policy is not the sole solution. Upon noting fiscal uncertainty’s impact on the economy, specifically hiring and investment, he called for Congress and the White House to take action.
“Although the outlook for the U.S. economy remains somewhat cloudy as we look into 2013, I remain a long-run optimist about where we are headed,” he said. “If uncertainties about the U.S. fiscal path and the future of the eurozone were resolved in a constructive manner, growth could pick up more vigorously than anticipated.”
