QE3 Was Designed to Ease the Cost of Mortgages, But Don't Expect Lower Rates Soon

One of the goals of QE3, the third round of quantitative easing announced by the Federal Reserve last week, is to make it even easier to get a home mortgage by further lowering rates.

Federal Reserve Chairman Ben Bernanke made this clear last week, telling reporters that the bond-buying program "should increase the downward pressure on long-term interest rates more generally, but also on mortgage rates specifically, which should provide further support to the housing sector by encouraging home purchases and refinancing."

But don't expect to see those lower rates any time soon. Even though the housing market is currently running about 40 percent slower than its 2005 peak, the Financial Times reports that mortgage originators are already extremely busy. And in the short term they simply can't process additional volume:

This was partly designed to ease further the cost of mortgages, but bankers say the impact will be limited by a dearth of loan officers with banks reluctant to cut mortgage rates without the staff to process any increase in business.

"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."

Whatever the theoretical virtues of QE3 may or may not be, the true test of these sorts of economic interventions is whether they are workable in practice. And once again, we see a stimulus plan that isn't quite shovel ready. 

Comments

[sarcasmic]

Woo hoo! Let’s keep doing the same thing over and over and expect different results!

Insanity for the win!

[sasob]

Oh, I think they like the results they’ve been getting – or they wouldn’t keep doing it.

[MoreFreedom]

You are correct. The booms/busts don’t really hurt the politically connected, until they are voted out of office as a result. And when has that happened? Well, a few were voted out in 2010, but even then, it turns out only about 30% of the GOP 2010 Tea Party class, are really fiscal conservatives. The rest have already voted for corporate welfare and continued funding for more government. Even Ryan’s plan INCREASES spending 3.1% each year, and doesn’t balance until 2040 (which means never).

[Lord Humungus]

The Great Central Planning Committee demands that steel output must be increased! Ignore the lack of coal! And the number of steelworkers! And the fact we could buy it cheaper from Japan…

[Trespassers W]

Rates have been incredibly low for some time already. Who are all these people that still need to refi? And how on earth do refis support the housing market?

And are purchases really going to be kickstarted by another 25 bp drop in rates? Are there lots of people holding out, thinking “well, no way am I going to buy a new home at 3.125% in this economy, but maybe if the rates drop to 2.875%”? Sure, there have to be some, but enough to “support the housing market”?

[Ptah-Hotep]

Rates have been incredibly low for some time already. Who are all these people that still need to refi? And how on earth do refis support the housing market?

This is not for people who are buying houses. Otherwise, they could target them directly. Ask yourself why they are buying MBSs instead of sending a homebuyer a check when they purchase, then you will figure out what this is for. Same shit, different route.

[MoreFreedom]

Right – this is a handout to the Banksters and Wall Street, in return for all that campaign cash they give the politicians for the favors (at our expense of course).

[Pro Libertate]

This has the same vibe to me as all of that “Everyone should have a home, but it’s a sin to do risk-based pricing” nonsense that got us into this mess in the first place.

[VG Zaytsev]

Rates have been incredibly low for some time already. Who are all these people that still need to refi?

Those people are still out there (I’m one of them) but they can’t refi because the LTV’s is too high and or income-payment ratio is too low.

[Trespassers W]

they can’t refi because the LTV’s is too high

Thanks to HARP, that hasn’t been an issue for years, at least for conforming loans.

and or income-payment ratio is too low.

But in that case, no amount of interest rate manipulation by the Fed is going to help.

Anyway, allow me to rephrase: Who are all these people that haven’t refi’d yet, but will be able to once mortgage rates drop 25 bp?

[VG Zaytsev]

No one.

[VG Zaytsev]

We need da Worm to come tell us how awesome it is that the all powerful FED is forcing economic growth.

[R C Dean]

The main purpose of QE3 is to take garbage paper off the books of banks.

The fact that it may also hold down mortgage rates is a side effect, and not even a necessary outcome of the program. The Fed is going to be buying paper that is collateralized by mortgages. This will make more money available for new mortgages, but (unlike when it buys Treasuries), the Fed is not directly suppressing mortgage rates.

In any event, the mortgage market has had very low rates for quite awhile now. Keeping rates low, or even lowering them a trifle more, isn’t going to move the needle in the housing markets.

[VG Zaytsev]

Right, the real and only point is to prop up insolvent institutions.

[Ptah-Hotep]

The main purpose of QE3 is to take garbage paper off the books of banks.

This!

[Pro Libertate]

This was my first thought when I heard about QE3. More bailouts.

[Paul.]

More better bailouts…

[Randian]

Did they finally settle on a way they were going to value the garbage paper, though?

[R C Dean]

I couldn’t say, but since the point is to prop up the balance sheets of the banks they buy it from, I would guess it will be generously valued.

Of course, not all of it will come from banks. Some will probably come from pension funds, investment vehicles, etc. Still, what does the Fed care if it “overpays”? The point is to inject liquidity and shore up balance sheets, so overpaying is a feature, not a bug.

[Lord Humungus]

how much liquidity does the system need? We are awash in greenbacks.

[R C Dean]

When all you have is a hammer . . . .

[Paul.]

…everything looks like a market failure.

[Invisible Finger]

Why would lenders want it to be easy to get a loan with such low yield?

First MBS fell in price because defaults increased. Now MBS is falling in price because the yield is shit compared to the risk. Nobody who invests their own money makes these stupid mistakes more than once.

[Tim Cavanaugh]

It’s great to see macrotards trying to figure out why there’s still so little mortgage and refi activity even with rates so low they’re practically giving it all away like Crazy Eddy.

Think about it: You’re a bank, and you’ve just gone through an experience where one in every ten mortgages went tits up. (Maybe a lot more depending on what bank you are.) You have an even higher percentage of mortgages you expect to go tits up because they’re hopelessly underwater. Your potential customers are, with plenty of reason, terrified of taking on any new debt. The people who might want to refinance are motivated mainly by the fact that they’re still locked into 5, 6 and 7 percent rates, but now that you actually are preforming due diligence you see that your real choice is to collect a high rate until they default or a low rate until they default. There are plenty of reasons to believe the value of the underlying asset will remain static, and quite a few reasons to believe it might actually fall again. What possible incentive do you have to take on a bunch of risky new loans for the princely sum of 3.5 percent?

[Invisible Finger]

The only good thing I can possibly see coming from interest rates extremely low is the end of the 30-year juice loan for buying a house. It was an FDR-era “temporary” fix that became permanent. Time for it to finally die.

[cthorm]

but now that you actually are preforming due diligence you see that your real choice is to collect a high rate until they default or a low rate until they default.

That was the most sensible thing you’ve said Tim. No one wants to modify/refi these people, so they’re charging large fees and dragging their feet.

But the “macrotards” are NOT expecting lower MBS rates and refis to do much of anything. That’s not what QE is for. Conditional QE is supposed to stabilize the path of MV (MV=PY=NGDP).

[sarcasmic]

What possible incentive do you have to take on a bunch of risky new loans for the princely sum of 3.5 percent?

The knowledge that the Fed will buy them off of you just as Freddy and Fannie did.

[Tim Cavanaugh]

Damn, I knew that Bernanke had it figured out! He’s a Princeton man, you know.

[Tulpa Doom]

Shrike will be along soon to remind us that Freddy and Fannie debt is the safest investment in the world.

[Randian]

Congrats on having the 326,000th comment.

[MP]

3.2M

Don’t shortchange our efforts.

[Randian]

Whoops.

I just assumed that the counter was reset from site change to site change.

[Tulpa Doom]

I wonder if they count deleted comments in that total.

[Tulpa Doom]

What do I win?

[Paul.]

Ten free comments.

[darius404]

Collect your comments now! With your next ten comments, get one trillion comments free! (Normal rates may apply.)

[Randian]

“should increase the downward pressure on long-term interest rates more generally, but also on mortgage rates specifically, which should provide further support to the housing sector by encouraging home purchases and refinancing.”

Because a 3% mortgage isn’t low enough?

Good lord.

[Tulpa Doom]

Apparently Bernanke is a papist, and considers any positive interest rate to be a crime against nature.

[Invisible Finger]

What does the Koran say?

[Paul.]

Storm thine enemy’s embassy if he hath blasphemed thine profit.

…Get it… profit?

Never mind…

[Jersey Patriot]

Hey, I’m hoping it goes negative.

[Tulpa Doom]

If the problem is not enough loan officers, why aren’t the mortgage originators going on a hiring spree? It’s not like the labor market is tight right now.

This sounds like an excuse on the part of the banks.

[The Late P Brooks]

There’s nothing that will force mortgage originators themselves to lower the rates that they’re offering to consumers.

This is why America needs Elizabeth Warren in the Senate!

[The Late P Brooks]

Did they finally settle on a way they were going to value the garbage paper, though?

I’m pretty sure we can assume they won’t mark to market.

[Randian]

Heaven forfend we clear out that dead underbrush. Best just to pile it on and hope it doesn’t catch fire again.

[Paul.]

This time the right people are in charge of the fire extinguishers.

[Obese American]

One thing not mentioned is that Fannie and Freddie just increased their fees to lenders which are of course passed on to consumers.

I work for a mortgage broker in L.A. and my lenders are telling me that the increase in fees will work out to about a 1/8 increase in the rate for all loans. So at best, the net result of QE3 will be to leave rates the same as now, with more $ flowing to Fannie and Freddie.

Last quarter Fannie made $8 Billion for the feds to help pay back what they pissed away in 2004-2008 (roughly). There is absolutely zero incentive for the administration to work out a plan to unload Fannie/Freddie until they can milk everything out of them they can.

[Invisible Finger]

For those who like it in chart form.

http://www.zerohedge.com/news/…..apses-more

[Invisible Finger]

And here’s a link (from Radley Balko) about Eric Holder suing a bank for NOT being fucked up.

http://www.luxlibertas.com/wsj…..oing-good/

[Jersey Patriot]

We know that when the Treasury pays interest on paper held by the Fed, the Fed is required to refund the interest to the Treasury. What about the mortgage paper?