I knew it was not the Fed's fault. Bill Dudley, President of the New York Federal Reserve Bank states, whereas "monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances."
I just argued last Friday that the Fed's actions had finally "goosed" up the mortgage market and we were finally getting the housing market going again. Jamie Dimon, Chief Executive Officer of JPMorgan Chase, apparently did too. "The housing market has turned the corner," he stated while releasing the bank's third quarter earnings.
Well, not really says Dudley. The Federal Reserve has been buying all sorts of mortgage-backed securities and this has lowered interest rates in the capital markets. But … this lowering of interest rates has not been fully passed on to consumers.
This comes from a remarks made by Mr. Dudley to the National Association for Business Economics in New York City on Monday. The "concentration of mortgage origination volumes at a few key financial institutions" meant that banks were not passing on low interest rates to borrowers.
We have a new problem in banking: there seems to be "a lack of competition" that has come out of the financial crisis coupled with considerably tougher regulation leading to "a host of banks" pulling back from the mortgage market. The consequence, only a few banks, like Wells Fargo (WFC) and JPMorgan Chase (JPM), granting new mortgages. Wells Fargo, it is reported, grants about one-third of all mortgages originated in the United States.
Due to the Fed's actions, the yields on mortgage-backed securities have been driven down, but the interest rates granted by commercial banks, which usually follow in parallel with the MBS market, have not experienced the same drop. "In a fully competitive market, the two rates should track each other, because banks typically package new mortgages into securities that are sold to investors. Mr. Dudley said concentration in the mortgage market was partly to blame." This from the Financial Times article.
A second reason for the lack of resilience in the mortgage market is the warranties that are required by Fannie Mae and Freddie Mac. These warranties can force the institutions packaging mortgages to sell in the MBS market to buy back loans that go bad.
Dudley argues that this fact could "discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere."
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In a fully competitive market, the two rates should track each other, because banks typically package new mortgages into securities that are sold to investors. Mr. Dudley said concentration in the mortgage market was partly to blame.
He said mortgage activity was also being hampered by warranties required by government mortgage financiers Fannie Mae and Freddie Mac, which can force banks to buy back loans that go bad. These, he said, "discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere."
But, there is another problem. Fannie Mae and Freddie Mac are now charging higher guarantee fees. In April, these fees were raised by 10 basis points to help fund "a payroll tax cut." In November they will rise again as Fannie Mae and Freddie Mac try to price mortgages in line with the risks that are associated with the mortgages they guarantee.
There you have it. The private sector is to blame for the fact that the Fed's efforts at quantitative easing have not been as successful as it might have been.
Somehow, I have trouble with this analysis.
What scares me most is that the Financial Times reporter states that these remarks "may herald greater scrutiny of lenders" like Wells Fargo and JPMorgan Chase. The mortgage market is the way it is, in my opinion, because of the way the federal government has fiddled around with it since the 1950s. The mortgage market used to be "more competitive" but the politicians, from both parties, believed that putting more Americans in their own homes would better help them to get re-elected.
So, we the politicians created the Department of Housing and Urban Development. In the 1960s they re-invented the Federal National Loan Mortgage Corporation (Fannie Mae) from its roots in the 1930s and created the Federal Home Loan Mortgage Corporation. The government created the mortgage-backed security. And, so on and so forth.
In the 1960s, the mortgage market took up zero percent of the mortgage market. By the end of the 1980s, as Michael Lewis reports in his book, "Liar's Poker," the mortgage portion of the capital markets was the largest sector of the capital markets. And, who played in them? The largest financial institutions in the country!
Furthermore, the government has engaged in 50 years of credit inflation and what happens when we have credit inflation? Well, people take more financial risk, people take on more leverage, and people engage, more and more, in financial innovation.
It is no wonder that the financial industry is more concentrated. You, Mr. Government, created the environment for more and more concentration. When you have 25 domestically chartered banks holding almost two-thirds of the assets in the banking system you have concentration.
However, I find, Mr. Dudley's remarks very weak. For one, two of his three reasons have to do with government entities, not with the concentration of the private sector banks. Second, the interest rates banks have charged on loan originations may not have fallen as far as have the rates in the capital markets on mortgage-backed securities, but there may be an economic reason for that. The reason that these rates have not fallen further may have something to do with the risk associated with 15-year mortgages, reasons why other banks are not granting mortgages at all. But, then a regulator doesn't really understand that.
Mr. Dudley should be satisfied with the fact that lending on mortgages seems to be picking up and this, as Mr. Dimon states, may herald some rejuvenation of the housing market. Anything more may just be raising red flags that Mr. Dudley really should not want to get into at this time.