Push for Cheaper Credit Hits Wall
The Federal Reserve's intensified campaign to push mortgage rates lower has hit a wall, in part because a shift in the lending landscape has made some banks unable, or unwilling, to pass along cheaper credit.</br></br>Since the Fed began buying mortgage-backed securities to lower interest rates four years ago, rates on 30-year fixed-rate mortgages have fallen nearly three percentage points and averaged 3.37% last week, according to Freddie Mac.</br></br>While current rates are the lowest in generations, some economists argue that they should be even lower -- perhaps 2.8% based on the historical relationship between mortgage rates and yields on mortgage-backed securities. The economists posit that banks are keeping the rates artificially high, boosting profits and depriving the economy of the full benefit of the Federal Reserve's efforts.</br></br>No bank-by-bank survey on the matter has been conducted. But some lenders say they are simply making a fair rate of return on a business that has much higher fixed costs than it used to. "We have a different cost structure now," said Stewart Larsen, who runs the mortgage banking division of Bank of the West.</br></br>Lenders profit on the gap, or spread, between their cost of obtaining money and the rate they charge when lending it out. Before the financial crisis, this spread averaged around 0.5 percentage point and widened to about 1 percentage point in the years after 2008. In October, after the Fed embarked on a new round of mortgage bond purchases, the spread leapt to 1.6 points and currently is hovering around 1.3 points.