KEY POINTS:
US Federal Reserve Chairman Ben Bernanke can't revive the housing market and the banks are no help.
The US Federal Reserve has cut interest rates five times since September and last week pumped US$200 billion into the financial system. Its New York branch has provided funds to help rescue Bear Stearns.
Those initiatives haven't brought down mortgage rates for residential borrowers in the US, whose success in refinancing or buying would help bolster the economy.
The interest rate on a 30-year fixed-rate mortgage has climbed to 6.37 per cent from 5.5 per cent since January 24, according to the Mortgage Bankers Association, as financial institutions try to cover $195 billion in mortgage-related losses and save capital for future losses.
"The mortgage rate isn't down as much as it should be because the banks are in desperate straits and they need to maintain a larger spread than they normally would," said Alan Nevin, chief economist with the California Building Industry Association in Sacramento.
"The banks need to generate income and the easiest way to do that is to broaden the spread. If they pay 3.5 per cent and charge 6 per cent, that's a lot of money."
Over the past 10 years, the average spread between 10-year US Treasuries and 30-year fixed-rate mortgages has been 1.75 per cent. Last week it was 2.83 per cent, pushing mortgage costs up.
The Fed cut its target for federal funds 13 times from January 3, 2001, to June 25, 2003. Following the moves, mortgage costs fell eight times and rose five times, according to Bankrate.com.
That has little to do with Fed policy and instead reflects the lack of confidence of investors, who aren't buying securities backed by home loans, says Kenneth Rosen, chairman of Rosen Real Estate Securities and chairman of the Fisher Center for Real Estate at the University of California.
"No one wants to lend much of anything today," Rosen said. "The secondary market system for many loans has broken down. People don't trust the paper. We have an investor strike going on."
The Fed last week agreed to make US$200 billion available to securities firms by lending Treasuries in exchange for mortgage-backed securities because many private investors have quit buying mortgage-backed bonds. Record home foreclosures sent premiums on Fannie Mae and Freddie Mac-backed securities to the highest in 22 years this month.
"Banks are trying to increase their reserves to get through this period where we have greater uncertainty, and also uncertainty about future losses," said Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California in Los Angeles.
Home-loan issuance will drop by 15 per cent this year, according to the Mortgage Bankers Association.
BUYOUT COULD BULLDOZE PLANS
JPMorgan Chase's buyout of Bear Stearns and its Manhattan headquarters may prompt JPMorgan to pull out of its commitment to build at the World Trade Centre site.
New York-based JPMorgan, the third-largest US bank, said it will build a US$2 billion, 40-storey skyscraper at Ground Zero on the site of the former Deutsche Bank AG building.
Those plans are now in question as mortgage-related losses decimate Wall St banks, which have fired more than 30,000 workers in the past seven months and written down or lost at least US$195 billion.
"Who wants to commit to occupying a certain amount of square footage when you don't know what the future is going to hold, and whether or not you'll need those employees?" said Susan Smith, manager of the real estate business advisory services group for PricewaterhouseCoopers LLP in New York. "We just don't have confidence about the future."
- BLOOMBERG
