Lack of Competition Hurting U.S. Mortgage Market

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

According to comments made by a senior policy maker for the U.S. Federal Reserve, the mortgage market has been undermined by big banks and financial policies. These comments may signal the beginning of big lender scrutiny for banks such as Wells Fargo and JPMorgan Chase.

President of the New York Fed Bill Dudley stated that the concentration of newly established mortgage remains locked by a few critical financial organizations, essentially alluding that these banks have not passed on the benefits of low rates to hopeful borrowers.

These comments involve a relatively fresh problem for U.S. financing: a deficiency of competition following the mortgage crisis and the institution of tougher regulations, which have lead many banks to stop originating mortgage loans.

Both Wells Fargo and JPMorgan Chase have reported all-time high profits last week due to the recent rise of mortgage loan applications. Wells Fargo now initiates approximately one third of new U.S. mortgages, reaching unprecedented levels in a sector which has previously been kept in check with much fragmentation.

Dudley additionally said that officials should attempt to cultivate a greater level of competition in mortgage origination to prevent mortgage rates benefits from being withheld.

With this failure to spread the benefits of low interest rates, these banks have essentially lessened the positive effects of the Fed stimulus, as consumers must pay more, having less to spend in other areas and some being unable to afford home purchase.

The Fed’s $40 billion per month third round of quantitative easing, known colloquially as QE3, has decreased the production of mortgage-backed securities; however, the advantageous interest rates have yet to reach consumers.

In a sufficiently competitive market, two mortgage rates should match each other for the ease of banks to securitize these mortgages and sell them to investors. Dudley blames concentration within the mortgage market for this lack of rate benefits.

Furthermore, Dudley stated that mortgage activity has been impeded by GSE contracts from Fannie Mae and Freddie Mac, which has the ability to force banks to repurchase loans that fail. This policy, Dudley said, discourages home purchase lending and causes banks to hold reluctance when issuing home refinance loans for mortgages originated at other banks.

Moreover, Dudley attributes a third problem to the presence of the recently increased G-fees, or guarantee fees charged by the GSE’s. These charges increased by 10 basis points in April in order to fund a tax cut, rising again in November to better price securitized mortgages with the risk involved.

The New York Fed controls the majority of biggest banks within the U.S. and Mr. Dudley has sat as acting chairman of the rate-setting Federal Open Market Committee. In a speech, Dudley stated that despite the Fed’s previous efforts at stimulus, the QE2 was simply not assertive enough.

According to Mr. Dudley, these recent actions have constituted a recalibration of Fed regulations as it attempts to reduce unemployment levels without harming or diminishing the economy.