Econintersect: The Financial Times has a blockbuster story just posted at 2am Monday 17 September (New York time). There is a major stumbling block to the implementation of QE3 - it's the banks!
This will not be surprise to GEI News readers because we had a story posted last Thursday about a study by the Federal Reserve Bank of Chicago which found the major banks were not competent to deal with volumes of mortgage modifications needed to properly handle the HAMP (Housing Affordable Modification Program). Now the Financial Times reports that the banks cannot deal with the mortgage volumes that will be required by QE3.
There are two thrusts to QE3. One is to move some existing RMBS (residential mortgage backed securities) from bank balance sheets (a continued backdoor bailout for the banks) and the other is to create a vehicle for the creation of new RMBS through the issuance of new mortgages at lower rates.
Apparently the second part is not going to make it out of the starting gate. According to the Financial Times:
"In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer," said one executive at a leading lender, who requested anonymity. "Originators are massively backlogged in terms of origination volumes."
Steven Abrahams, MBS analyst at Deutsche Bank, noted that the yield on mortgage-backed securities fell more than 30 basis points after the Fed announcement.
"Very little of that is likely to make it through immediately to consumers," he said. "There's nothing that will force mortgage originators themselves to lower the rates that they're offering to consumers. Right now they have their hands pretty full in terms of the pipeline and managing paperwork and making loans. These folks are busy. There's not a bunch of people on long cigarette breaks."
The entire QE sequence has greatly increased the profitability of banks, as their cost of capital has come down and only a small part has been passed through in lower mortgage interest rates. According to the Financial Times, the spread yield on RMBS has been continually increasing as the Fed has gone through the multi-year monetary easing and continued ZIRP (zero interest rate policy).
Editorial note: The Fed has a policy that is designed to increase competition for lenders to issue loans in a free market environment. The biggest flaw in the strategy? There is no free market. It has always been an idealistic myth at the large corporation and financial institution level. But the myth is now so far from reality that the application of economic "principles" of free market capitalism is a completely laughable hoax. Unfortunately, our economic wizards don't even realize they are perpetrating a hoax.
- QE3 hit by mortgage processing delays (Tom Braithwaite and Tracy Alloway, Financial Times, 17 September 2012)
- HAMP Study: Banks Not Competent to Deal with Volumes of Mortgage Mods (GEI News, 13 September 2012)