A couple of generations ago, QE1 and QE2 would have signified enormous, beautiful ocean liners. There could be some metaphorical aptness for the Federal Reserve’s actions with similar names. What will the launch of its third sailing behemoth,
This third round of quantitative easing may have more effect on the mortgage business because this time, the Fed is targeting mortgage-backed securities for its purchase program. Increased demand should cause higher prices and lower yields, and lower yields could translate into a refinancing boom, and boon, for the industry.
This isn’t a slam dunk (to change metaphors), though. Mortgage rates are at record lows and have been for years, so the question is, how much lower can they go? With many banks getting money at less than 50 basis points, there still is some downside on mortgage rates, but the days of huge drops are over.
Also, many people have taken advantage of low rates and refinanced already (once or multiple times) so a modest decline in rates may not convince them to go to tall that effort yet again. (A middling or large one certainly would stimulate refis.)
On the downside, this de facto mortgage stimulus by the Fed is also a recognition that the mortgage market continues to be hobbled by its awesome collapse of four and five years ago and is not functioning effectively on its own.
The Fed no doubt is trying to stimulate the mortgage business in hopes it will, in turn, help stimulate the national economy. It is pulling the wrong string, however (new metaphor again). What needs to be stimulated, rather than the refi market, is the purchase mortgage market, and especially the part of it focused on new homes. Refis are essentially paper trails (or electronic trails now) while getting a mortgage on a new home requires construction of the unit first. That employs construction workers, contractors, subcontractors and creates the need for trips to retailers like Home Depot to fill them up with what people in the business world would call FFE (furniture, fixtures, equipment).
What stimulus would work here? A targeted tax credit for new home construction might do the trick. State and federal credits saved the mortgage business from collapse in the aftermath of the crisis. And in saving a sinking ship, we have finally come back to our original metaphor.
