America / Economy / Fiscal policy

Banks vs. Borrowers: Who are reaping the benefits?

On September 13, Chairman of the Federal Reserve Ben Bernanke announced a third round of quantitative easing that the Fed would enact to further jumpstart the sluggishly recovering U.S. economy. QE 3, as it is known, has the Fed buy 40 billion dollars worth of mortgage backed securities per month to make it cheaper for banks to issue mortgages, which, in theory, would make it cheaper for would-be homeowners to take out such loans.

Now, more than a month later, recent housing and bank reports indicate that the Fed’s actions may be benefitting banks more than the actual borrowers.

QE 3’s purchase of mortgage bonds has made it cheaper for banks to issue loans, but because of their high volume of mortgage applications, banks, such as JPMorgan and Wells Fargo, the nation’s largest mortgage lenders, have no intention of lowering rates for mortgage loans and their interest.

“The government can’t force banks to give out loans at lower rates any more than they can force Macy’s to sell me sheets for a dollar,” Karen Shaw Petrou, partner at Federal Financial Analytics, told The Washington Post.

Furthermore, banks have no incentive to lower rates for consumers given that interest rates are already at their lowest levels in 3 years. According to the latest Mortgage Bankers Association weekly survey, the average contract interest rates for 30-year fixed-rate mortgages are 3.57% ($417,500 or less) and 3.74% ($417,500 or more).

With such low interest rates, banks have seen a massive avalanche of mortgage applications and revenues. Wells Fargo reported earning 188 billion dollars in mortgage applications, an 11% jump from the third quarter in 2011. JPMorgan Chase also saw a 36% increase in their mortgage lending revenue from a year ago. If banks were to further lower their rates, a great flood of more mortgage and refinancing applications would further overwhelm banks’ capabilities.

With these figures, it makes little sense to expect banks to lower rates for consumers when demand is so high.

To put it simply, if there is a line for your lemonade stand wrapped around the block, would you make lowering your prices a top priority?

The high levels of mortgage applications is a clear indicator that the housing market is on the rise once again, a ray of hope in this otherwise grey and cloudy economic recovery. However, as long as the Federal Reserve keeps cushioning the bottom lines of major banks, and they subsequently stash away the record profits, little can be done to further open up the housing market to new homebuyers.

What will drive the housing market is an increase in competitiveness. Consumers should look to multiple organizations when searching for a loan, not merely relying to the major players.

“There are still enough mortgage lenders out there who should be able to undercut the big guys,” former Fannie Mae economist Thomas Lawler told The Washington Post. “You may see the smaller guys get more aggressive.”

Federal agencies pumping fabricated dollars into capitalist markets can only do so much to stimulate growth and expansion. Competitive forces outside of government control are what will drive the U.S. economy back into full force.

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