Share

Mortgage rates respond to new round of quantitative easing

|
Real Estate,Jann Swanson

To stimulate the economy via continued low interest rates, the Federal Reserve in September launched its third round of quantitative easing. This program, however, differs from the first two initiatives, according to economic experts, in that it potentially creates a semipermanent buyer for mortgage-backed securities -- which may help keep today's low rates low.

The Fed pledged to purchase $40 billion per month in government securities, primarily those secured by residential mortgages (mortgage-backed securities, or MBS). QE3 swung into gear immediately with the purchase of $23 billion in securities.

The new initiative joins Operation Twist, by which the Fed swaps short-term securities for securities with longer maturities. Cumulatively, the initiatives are expected to pump $85 billion a month into the bond market.

QE3 is different "because it is open-ended both in terms of dollars and time," explained Anand Bhattacharya, a finance professor at Arizona State University's W.P. Carey School of Business.

"This time the Federal Reserve will spend $40 billion per month purchasing MBS for as long as it takes," Bhattacharya said. Though he is not sure if there is a benchmark for "as long as it takes," others have speculated it may be tied to a specific measure of employment.

"What these Federal Reserve programs have done," he said, "is to create a semipermanent buyer for MBS, taking a large percentage of the securities off of the market, creating a high demand, and thus keeping rates low."

QE3 appears to be working, said Scott Davis, branch manager of Homestead Funding Corp. in Fairfax. Rates in the local area were "hovering around 3 1/2 to 3 3/8 percent before the Fed announcement and are around 3 1/4 for the best borrowers three weeks later."

Davis said the ongoing unease in Europe and the upcoming election might be influencing rates as well.

The Washington area is unique because of the higher loan limits in effect. "Our conforming Freddie Mac and Fannie Mae limit is $625,500, and for [the Federal Housing Administration] it is $729,750, compared to $417,500 most other places," he said. "Because our loans aren't quite typical, our rates are a little higher."

Davis has also seen an escalation in demand over the past few weeks but isn't sure how much can be attributed to the easing.

"The Fed announcement coincided with what is typically a seasonal increase in business," he said. "There is always a lull in late August and early September as school starts and people get into their fall pattern. All I know is my phone has been ringing off the hook and I am putting in 10 to 12 hour days since the announcement."

Bhattacharya said he sees an opportunity for rates to go even lower. "If one looks at the historic spread between the MBS yield and rates, and checks that spread today, it appears that rates are currently 60 to 70 basis points higher than history tells us they should be," he said. "Therefore mortgage rates may come down, maybe even that much."

Competition and demand, however, also will play a role. If demand keeps lenders at capacity they may hold rates steady to keep the workflow manageable, he said. But if even one lender drops rates, competition will bring them down everywhere.

View article comments Leave a comment