Bill Dudley, president of the New York Fed, said "concentration of mortgage origination volumes at a few key financial institutions" meant that banks were not passing on low interest rates to borrowers.
The comments highlight a new problem in U.S. finance: A lack of competition after the financial crisis and tougher regulation leading many banks to pull back from arranging mortgages.
Both Wells and JPMorgan reported record profits last week because of a surge in mortgage loans. Wells now originates about a third of new U.S. mortgages — a level unprecedented in a sector that, historically, has been fragmented.
Mr. Dudley said officials should consider ways "to foster competition in mortgage origination to ensure a more complete pass-through of low secondary mortgage rates to households."
Failure to pass on low mortgage rates reduces the effect of Fed stimulus, because consumers have less money left in their pockets, and fewer people can afford to buy a house.
The Fed's new $40 billion-a-month, open-ended program of quantitative easing, known as QE3, has driven down the yield on mortgage-backed securities. But the interest rate on new mortgages for consumers has not fallen in line.
In a fully competitive market, the two rates should track each other, because banks typically package new mortgages into securities that are sold to investors. Mr. Dudley said concentration in the mortgage market was partly to blame.
He said mortgage activity was also being hampered by warranties required by government mortgage financiers Fannie Mae and Freddie Mac, which can force banks to buy back loans that go bad. These, he said, "discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere."
A third problem, he said, came in the form of higher guarantee fees charged by Fannie and Freddie. Those fees were raised by 10 basis points in April to help fund a payroll tax cut and will rise again in November as part of an effort to make Fannie and Freddie price mortgages in line with the risks that they take.
The New York Fed regulates many of the biggest banks in the U.S. and Mr. Dudley is vice-chairman of the rate-setting Federal Open Market Committee. In a dovish speech, he said that despite the Fed's previous rounds of asset purchases, such as the $600 billion QE2 launched in November 2010, it had not been aggressive enough.
Mr. Dudley emphasized the new language the FOMC used in September, when the central bank said it expected to keep rates low for a considerable time, even after the recovery strengthens.
"If we were to see some good news on growth I would not expect us to respond in a hasty manner," he said. "Only as we became confident that the recovery was securely established would I expect our monetary policy stance to evolve."
That language reflects what Mr. Dudley called a recalibration of Fed policy, where the Fed has decided to push harder to bring down unemployment, even without any weakening in the economy.