TRICKLE-DOWN STIMULUS
Fed’s Effort To Boost Housing a Windfall for Banks at First
WASHINGTON — The Federal Reserve took aim at the nation’s wobbly housing market last week with its biggest stimulus action in two years, but that firepower is doing little to lower mortgage rates or make home loans more available for Americans.
Instead, banks are set to see a windfall since the Fed’s actions will immediately lower the cost of issuing loans. It may take months or longer for benefits to trickle down to consumers, analysts say.
The emerging scenario highlights the limitations of the Fed’s ability to jump-start the housing market on demand: Rather than intervene directly with consumers, the Fed must rely on banks, brokers and other industry actors to offer borrowers better terms.
Banks say they are keeping rates high right now because lowering them any further would overwhelm them with customers. They say that over time, as volume thins out, rates could come down to attract new borrowers.
“Bank of America, Wells, Chase, whomever, have fixed capacity. You can’t take in more loans than you can handle,” said Matt Vernon, a senior mortgage executive at Bank of America.
Critics argue that banks are simply maximizing profits at the expense of consumers. Mortgage bankers are recording higher gains from home loans as the gap widens between the interest rate they charge consumers and the rate they must pay investors who finance the loans by buying mortgage securities.
Another challenge for the Fed is that many people eager to buy a home or refinance an existing mortgage simply can’t qualify because of poor credit histories. That may not change even if rates fall.
People “are seeing a dangling low fruit, but they just cannot reach it,” said Lawrence Yun, chief economist for the National Association of Realtors.
At a news conference last Thursday fol lowing the announcement that the Fed would begin buying $40 billion worth of mortgage bonds per month, Fed Chairman Ben S. Bernanke faced several questions about the significance of the central bank’s actions on the housing market.
Bernanke said that the initiative should “provide further support for the housing sector by encouraging home purchases and refinancing.”