QE3 Impact on Housing?
In January, 2009 the Fed didn’t hold any mortgage-backed securities.
Today they have $843 billion, and yesterday they “agreed to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”
“These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
(seen at CR, HT josap)
Will the Fed’s buying more MBS make a difference in housing?
Everybody I know was happy at the thought of getting a 3.875% rate. Freddie Mac’s 30-year rate was 3.55% this week. If the Fed’s actions push them lower, what is the effect on monthly payments?
They are only buying agency paper, so let’s look at the conforming $417,000 loan amount:
$417,000 @ 3.55% = $1,884.17
$417,000 @ 3.00% = $1,758.09
If 30-year conforming rates got all the way down to 3.00%, buyers would either save $126/mo., or be able to afford a $30,000 higher mortgage and pay the same $1,884.
But JimG nailed it – this MBS buying spree will allow banks to offload stinky paper to the Fed, rather than foreclosing. Banks can predict when a mortgage is going bad – because borrowers people typically slow-pay before defaulting. Servicers would be able to dump any suspected about-to-default mortgages, and keep the short-sale desk open for the borrowers who want to cooperate over the next few years.
The Fed would probably be more accomodating of the folks who don’t pay, so defaulters would enjoy an extended free-rent period. Foreclosures will dry up further (causing banks to appear solvent), the real-estate market will have fewer distressed sales giving people the idea that prices will improve soon, and the Fed will look like a hero.
In the meantime, we’ll have tight inventory and more OPTs.