| NEW YORK
NEW YORK Dec 3 Frustrated Federal Reserve
policymakers on Monday sought an explanation from mortgage
lenders as to why the benefits of lower interest rates were not
filtering to home buyers as quickly as in the past even as
At an all-day New York Fed workshop, officials from Fannie
Mae, Freddie Mac, Wells Fargo & Co
and other big lenders will be asked why there is a growing
disconnect between the rates Americans pay on home loans, and
the yields on mortgage-backed securities (MBS).
The question has puzzled central bank policymakers who worry
the situation is undercutting their efforts to stimulate the
country's slow economic recovery from recession.
Since September, when the Fed targeted the U.S. mortgage
market with its latest round of large-scale bond purchases, the
closely watched spread between the interest rates homeowners pay
and what investors reap on mortgage-backed securities has
widened to record levels.
The Fed's purchase of $40 billion per month in agency MBS
has made a big splash in the secondary market. Yet in the
primary market, the drop in the mortgage rates that home buyers
can get from lenders has not been as pronounced as the central
bank wanted, lagging historical trend.
This clog in the passage between the primary and secondary
markets undermines an important reason for the Fed's monetary
stimulus: kick-starting a housing sector that was at the heart
of the 2007-2009 financial crisis, and that has only just begun
to show some life.
"There is clearly something that is manifesting as a form of
constraint," Jeremy Stein, a Fed governor, said when asked about
mortgage lending at a Boston conference on Friday.
"For me it's a little hard to unpack exactly what the
mechanisms are, but I think it's something that deserves a fair
amount of attention."
Stein highlighted odd differences in the availability of
credit, depending on the type of loan, where lenders seem to
treat mortgages more conservatively than they do auto loans made
to the same household. "Whether it's a regulatory or a put-back
risk ... there's clearly just quantitatively not the volume
happening," he said.
The Fed wants to know what role put-back risk - the
possibility underwriting of a loan violates Fannie and Freddie
guidelines, forcing a bank to repurchase it from the agencies -
plays in the widening spread between secondary and primary
It also wants to know what role bank profit plays.
In a paper published last week, Fed researches show the
market value of the typical offered mortgage has quadrupled in
the last five years. That implies, they argue, either a parallel
rise in a lender's profits or its costs, or a rise in both
profits and costs.
The New York and Boston branches of the central bank are
co-hosting the Monday workshop, held just a couple blocks from
Wall Street. Boston Fed President Eric Rosengren, a voter next
year on central bank policy, is set to give a keynote speech.
Among those on the hot seat are Fannie Mae and Freddie Mac
senior vice presidents Anthony Reed and Stephen Clinton,
respectively, as well as Matt Jozoff of JPMorgan Chase & Co
, Mohan Chellaswami of Wells Fargo and Kenneth Adler of
Citigroup Inc, among others.
Stakeholders in the MBS market will also take part in panel
discussions, including Scott Simon from bond-fund giant PIMCO.
Keith Ernst, associate director at the Federal Deposit Insurance
Corporation, is also on the list of speakers.
JUST PASSING THROUGH
While the housing market has turned a corner this year with
prices rising, access to credit has been tight, potentially
limiting how much the market can recover if would-be home buyers
are shut out.
Although the housing market has led the broader economy out
of recessions in the past, the sector has been absent from the
current recovery until recently. Fed Chairman Ben Bernanke has
pointed to this "missing piston" in the U.S. economic recovery
in defending the choice of buying mortgage bonds, and not
Treasuries, in QE3.
A move toward more conservative underwriting standards since
the mortgage-market-inspired financial crisis explains part of
the widening spread between primary and secondary yields. A
concentration of mortgage originators since the crisis explains
Before 2000, the spread between yields on newly issued
agency MBS in the secondary market, and an average of mortgage
loan rates from the Freddie Mac Primary Mortgage Market Survey
in the primary market was mostly stable at about 0.3 percent.
That widened to a new equilibrium at about 0.5 percent
between 2000 and 2008, before doubling the following year,
according to the Fed paper.
Immediately after the central bank announced on Sept. 13 its
third round of quantitative easing, dubbed QE3, however, the
spread temporarily spiked to more than 1.5 percent.
William Dudley, the New York Fed president and a former
partner at Goldman Sachs, has said that QE3 would have had a
more pronounced effect on the economy if "pass-through" rates
between the secondary and primary markets were higher.
The incomplete pass-through, he said in October, is due in
part to "a concentration of mortgage origination volumes at a
few key financial institutions, and mortgage rep and warranty
requirements that discourage lending for home purchases, and
make financial institutions reluctant to refinance mortgages
that have been originated elsewhere."