Last week, the Federal Reserve announced that it will start buying an additional $40 billion a month in mortgage-backed –securities (MBSs) -- quantitative easing (QE3), to ensure interest rates remain low.
However, according to one banker, "In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer." This analyst believes borrowers will not benefit from QE3 because major lenders turn away home loan and mortgage refinance applications.
Consequently, mortgage interest rates have been higher than what rates should be at this time.
One mortgage executive explained that lenders have a shortage of mortgage staff required to process a backlog or loan originations and refinance applications. As a result, lenders remain hesitant, when it comes to cutting mortgage rates, because they do not have the employees in place to process the potential avalanche of loan applications. Most lenders will only process their current clients for mortgage refinance requests.
Banks Finding It Hard to Keep Up
Mortgage lenders state that the average time for processing mortgage loan request is on 30-90 days after agreeing to make a loan. JP Morgan Chase and Wells Fargo handle approximately 50 percent of the volume of new loan applications. In response, these institutions have reassigned staff to handle mortgage origination. Nonetheless, they still find it difficult to handle the mortgage application backlog.
One lender said, "We would love nothing more than to double the volume of origination right now." Bank of American cut back on mortgage originations a few years ago and has not back-tracked on that decision.
Effects of QE3 on Economy
In a normal economy, low interest rates encourage people to buy houses and homeowners refinance their home loans. In addition, businesses use low-cost loans to invest in facilities, equipment, inventory, and add jobs. This third round of quantitative easing is necessary because QE1 and QE2 have not produced the results anticipated and the economy remains weak.
Injecting more money into the system has kept interest rates low. For the week ending September 13, the Freddie Mac survey revealed the average for a 30-year fixed-rate mortgage at 3.55 percent. In January, the product had an average interest rate of 3.92 percent.
In January 2010, the benchmark mortgage product had an average rate of 5 percent. In July 2012, the 30-year fixed-rate mortgage dropped to its lowest point in history at 3.49 percent
Mortgage-Security-Bond Prices Rising
Mortgage-backed- security prices increased after the Fed announced its latest bond purchase program. However, the yield or coupon rate, which consists of the interest gained by bond investors, dropped 30 basis points on the news release. Mortgage rates move in accordance with the yield on bonds.
When the yield falls, the interest rate on home mortgages and mortgage refinances also drop.
Chairman Ben Bernanke stated that the Feds will probably amp up the amount of bonds it purchase each month and use other policy-making tools if the economy does not respond favorably. The willingness of the Fed to state its intentions (to take additional action steps if needed) makes this initiative stand out from earlier bond and Treasury buying programs.
Banks and Financial Entities Gain From QE3
In the press conference following its September policy meeting, Bernanke stated that QE3 would have an effect of an "a whole range of rates," by putting downward pressure on rates. Bernanke also said that QE3 could affect home equity as well as home values.
The shares of bank stocks climbed on the news of QE3. Mortgage bankers like Morgan and Goldman Sachs Stanley make money from underwriting stock offerings and bonds. Mortgage lenders and other financial institutions also profit from higher asset valuations.