WILL BANKS BALK AT LOWERING MORTGAGE RATES?

Some reporters and analyst in the financial media are now saying mortgage rates will not decline appreciably despite the feds purchase of another trillion dollars in mortgage backed securities and federal debt. According to these sources banks have no incentive to pass through the lower interest rates to consumers, home buyers and other creditors because they are already doing a brisk refinancing and loan origination business at current historically low rates.Iit may be in this view to keep the spread between what they pay for funds and what they charge for funds as wide as possible in order to restore their balance sheets to better health.

All this may seem logical from the point of view of the banks immediate financial interest. But it should be remembered that the stability of the financial system cannot be restored in the absence of economic recovery and vice versa. So lowering the cost of mortgages and other consumer debt should be in the banks long term interests because doing so will contribute to restoring economic growth and stability. In any event, homeowners with existing adjustable rate mortgages will benefit because the indexes to which such rates are tied are going to decline over the next year or so.