Mortgage rates lowest ever recorded. But by a historical measure, they should be even lower.
During the last years, a wide gap between the mortgage rate hunters and a benchmark interest rate investors demand to buy bonds backed by home loans.
Normally, this would obscure metric of interest to bankers, brokers and dealers in securities backed by mortgages. But housing is still dragging on the economy, the spread is potentially slow recovery and important to all key decision makers in Washington to homeowners who could use extra dollars each month.
For months, a key interest rate on mortgage-backed securities known as the current coupon-yield declined more rapidly than the average U.S. mortgage rates at 30 years.
Some say that the wide distribution shows large banks that dominate the mortgage market are flexing their muscles by keeping prices relatively high. Others argue the difference reflects the increased regulatory costs, risks and realities of making mortgages.
Anyway, the spread is wide. Tuesday afternoon, it was 0.96 percentage points, almost double the average for nearly 30 years. It was as high as 1.20 percentage points this year.
“For me, it tells us is that traditional monetary policy measures to help get the housing market rolling again … they are lower than normally would be, “said Columbia University’s Frederic Mishkin, a former Fed governor.
Efforts by the Federal Reserve and others in promoting housing depends on the mechanics of the banking system to pass along the savings and benefits for consumers. The wide gap between mortgage rates and mortgage suggests that this mechanism of gears are gummed up.
“It’s not a rounding error, it is something to take note of,” said Susan Wachter, professor of real estate and finance at the University of Pennsylvania Wharton.
To be sure, consumers see the lowest rates in several generations. The rate to be 30 years fixed rate mortgage averaged 3.87% for the week ended Thursday, 5% against the previous year. This is the lowest in the survey data from Freddie Mac, which dates back to 1971.
If history is any guide, it should be much lower. With yields on securities backed by these levels, the 30-year mortgages at fixed rates would be about 3.40% if the difference was around its historical average of 0.50 percentage points.
This rate would save an American owner with the average outstanding loan balance of approximately $ 155 000 $ 41 in monthly mortgage payments, compared to the current rate.
During the seven years that someone is usually a 30-year mortgage, which translates into a difference of about $ 3,446, according to figures provided by the domestic trade publication Mortgage Finance.
The wider spreads usually result in better margins for banks and brokers. And some lenders have seen profitability on mortgages will improve as the spread widened.
Some observers indicate that the increased concentration among large banks that dominate the mortgage market, it helps to better explain the large differences. They argue that because there are fewer banks who do most of the mortgage compared to past years, it is easier for them to gain market share without offering unbeatable prices.
“It’s a lack of competition. We have not really seen a competitive market since 2008, “said Guy Cecala, publisher of mortgage financing within.
In 2011, the five largest banks had a hand in 59% of mortgages grouped in government-guaranteed mortgage-backed securities, an increase of 45% in 2004, according to Inside Mortgage Finance. Recently, major banks have sharply reduced their mortgage business.
Bankers push against any notion of oligopoly.
“The mortgage is extremely competitive,” said Franklin Codel, head of production mortgage to Wells Fargo Home Mortgage.
There are other factors at work. For one thing, the fees charged by mortgage lenders the government-controlled Fannie Mae-funded enterprises and Freddie Mac are set to rise this year. Increases paid to the payroll tax break passed by Congress in December.
Analysts point out that it is difficult to disentangle how much of the spread is due to the pricing power of banks with more control over the market, and how much could be structurally higher costs of doing business in the remodeled by the U.S. mortgage market crisis.
Banks and mortgage lenders stressed that the costs of loan underwriting, conducting a detailed review of financial statements and employment background got the consumption of more expensive and time.
In part, this reflects the experience of some banks, which were forced by Fannie and Freddie to buy back loans that soured loads, making them more cautious. Others say that Fannie and Freddie have grown much more difficult for the documentation they will accept loans.