Mortgage rates have fallen dramatically in the last few years, largely thanks to the efforts of the Federal Reserve, but they could be even lower, 2.83 percent in fact, according to the New York Times. In recent years banks have begun to generate revenue by charging borrowers a higher interest rate on loans than the rate they are paying on the bond market — thus keeping rates stuck at an artificially high 3.55 percent on a 30-year fixed rate, government-guaranteed mortgage. Calculating the difference between bond and mortgage rates, the Times determined that the gap between the two numbers is rising. So banks, even government backed ones, are not passing savings on to borrowers.
For instance, in September 2011, banks were charging an interest rate of 4.1 percent to borrowers, but were selling those mortgages back into the bond market at the rate of 3.36 percent: a difference of 0.74 percentage points. But since last year, that spread has risen to 1.4 percentage points. If the old spread had been maintained, the mortgage rates for borrowers would be 2.83 percent.
Last week the Federal Reserve announced its intention to buy $40 billion worth of Freddie Mac and Fannie Mae mortgage backed securities each month. By doing this the government hopes to keep long-term interest rates low. But if banks don’t budge, no amount of quantitative easing will get mortgage rates below their current position. [NYT]– Christopher Cameron