How Does The Recent QE3 FED Announcement Affect Mortgage Rates?

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The Federal Reserve made an announcement on September 13, 2012 about their plans to support a stronger economic recovery.  This was a much anticipated announcement, because of what the actions will do to mortgage rates and the overall economy in the future.

The two major actions the FED plans on doing as part of this QE3 are:

  • Purchase additional mortgage-backed securities at a pace of $40 billion per month.
  • Extend the target range of the federal funds rate at 0 – 0.25% percent through mid-2015.

Bond Prices and Mortgage Rates

When the FED purchases mortgage-backed securities, they keep the demand high for bond prices.  When bond prices are high, mortgage rates fall.  Mortgage rates should stay around the same average they have been most of this year.  The FED has helped keep the mortgage rates at historic lows, which drives buyers to buy homes, since the combination of very low interest rates and cheaper housing prices will motivate many buyers.  Lower mortgage rates have also opened up the opportunity for homeowners to lower their interest rate by refinancing their mortgage.  Lower interest rates, will lower their monthly payment — the hope being that by giving homeowners more money with lower payments, the remainder will in turn be put back into the economy.

The question many people wonder is when the FED decides to no longer purchase these securities to keep bond prices high, how will this affect the interest rates in the future?  Will they increase to 5%?  6%?  We all know that when mortgage rates rise, mortgage payments rise.  In turn, the purchasing power for buyers is lower and this reduces the sale of homes.

The Federal Funds Rate

The federal funds rate is the interest rate at which banks borrower from each other. The whole point of the federal funds rate is to motivate investors to borrow money at little to no interest. They then use this super cheap money to lend more money to people and businesses.  In theory, the more money that investors lend to people, the more this will stimulate the economy.

The FED is also encouraging investors to expand on mortgage programs and loosen guidelines. This will open up more oportunites for borrowers to get pre-approved to buy homes and homeowenrs to refinance to lower their payments. There is a lot of fear from investors, since defaults are a big concern.  If investors don’t have confidence in the economy, they will be hesitant to borrow more money, even if the interest rate is next to nothing. Some investors see big opportunities being able to borrow at 0% percent interest.  We are seeing this in the mortgage market with new investors coming out with mortgage programs and expanded guidelines.

What do you think about all this help from the FED?  Some say we are spending way too much money.  Some say the real estate market is the back bone of our economy, so an effort to keep interest rates low and expanding mortgage programs will encourage people to buy homes and stabilize the market faster, in order to avoid further disaster.

Photo: Sébastien Bertrand

About Author

Joshua Bucio is a Sr. Mortgage Advisor with 9 years in the mortgage business. He shares mortgage advice, so home buyers and homeowners can learn valuable advice when looking for a mortgage.

13 Comments

  1. There needs to be some incentives to get those who are scared of owning a home to decide to buy again. Some are so spooked that they may not get back into home ownership no matter how low the rates or prices go. Plenty of opportunities for investors though.

    • I agree with you Dan. There are programs that have been created by HUD and Fannie Mae for homeowners to pay very little money out of pocket to buy homes. Like the $100 down payment for HUD owned homes with a FHA mortgage. Although, the motive behind these programs is to get homeowners to buy the properties that are being held by HUD and Fannie Mae.

    • Are there real studies that show the average home buyer who is amply qualified and never foreclosed or did a short sale, is scared?

      I sometimes think the gov’t does things backwards. They think that more home ownership is better, and do anything/everything to make it happen. They negligently end up managing to get people to buy houses that simply don’t have the right makeup of a home owner, who should be renting.

      More home ownership isn’t automatically better for everyone. It is better for people that can handle the extra costs, maintenance, and other responsibilities. For those that can’t handle it, it’s a disaster that can eat up lots of money and have a major impact on their credit for years.

  2. Jeff Brown

    Hey Josh — Welcome to BiggerPockets Blog!

    Stellar first post. Speaking of investors. Would love to hear your take on a couple topics. First, do you suspect investors would love to buy loans made to real estate investors who have significant skin in the game, and far more financial strength and credit than most homebuyers?

    Second, it never ceases to amaze me how government regulators decry the lack of recovery in the real estate sector on one hand, while blocking it with the other. Here’s an example I’m sure of which you’re acutely aware.

    While Bernanke, Fannie, Freddie, and many others now push for ‘relaxed’ standards for owner-occupied type homebuyers, they continue to thumb their noses at some of the most highly qualified borrowers in the country — investors. My typical client has stellar credit, superb cash reserves, and a FICO score most would envy. Yet with 20-35% down payments into obviously cash flowing properties, they’re still barred from having more than 10 loans. It’s ludicrous. Meanwhile, the investor must have 7-10 times more skin in the game than a 20-something, wet behind the ears, first time FHA homebuyer, with a 664 FICO score.

    It boggles the mind.

    • I think the government’s emphasis right now is on helping all the 20something first time homebuyer get on the housing market, instead of institutional investors with 9 concurrent housing loans. Keep in mind that the housing bubble reached critical mass when hordes of self-styled investors started getting easy loans for buying 3rd or 4th homes as investment properties rather than primary residences. All of us are still suffering from the fallout.

      • Jeff Brown

        Super point, Alex, but it’s six years late. Today’s investors are paying 40-70% of what the faux investors were paying in 2006 for the same properties. They’re also putting 20-35% down and more, and getting the same loans Grandpa did in 1959 — 30 year, fixed rate, fully amortized. These are true investors, not the pretenders you so accurately described. Make sense?

    • Great point, Jeff. (I also subscribe to your bawldguy blog). You hit the nail on the head for the difficulties that fiscally-responsible sharp investors face today. With a proven track record in my rental market, a knack for finding great properties and making them cash flow better than the competitors, a stellar credit record and FICO score, and zero consumer debt, I still have to put 30% down to get a property loan–and that’s after I have to shop around to different banks because they don’t like that I’m self-employed.

      I’ve learned that getting credit on my (still reputable) personal name is not the way to go. Building business credit opens so many new financing doors for investors.

    • Hey Jeff, thanks for the warm welcome!

      As for real estate investors having more skin in the game, in order to lend more, try to remember this…lenders create their guidelines based on risk of default. They look at the history of default in the past and look at what the majority of borrowers had in common. Back in the day, a 580 credit score used to be allowed by FHA lenders, but many of the defaults came from people with scores below 600. This causes a change in credit score minimums. If a small down payment was the problem for many defaults, then we would see programs coming out with 20% minimum down payments for example. I’m assuming not enough skin in the game is not considered a high enough risk, since there are tons of small down payment programs available.

      I’ve always said to people that lenders could still come out ahead with larger down payment investors. If you were to put 50% down on a property and end up going through foreclosure, the lender will still have enough equity in the property to recover from the cost of the foreclosure process.

      The limit to the amount of properties or mortgages one person has is also going to come from risk of defaults they have seen in the past. Investment properties are high risk in the first place, because they know if you were in a financial problem were you had to let a property go, you are going to let the investment property go before the primary residence. The more properties you have the higher the risk gets. Putting a limit on this only makes sense in their eyes.

      You will continue to see incentives for home buyers and first time buyers looking to purchase primary residences, because they think this will stabilize the real estate market the fastest. When first time buyers buy a home, the current owner can then buy their “move up” home and the seller of the move up buyer can buy their home and so on. This keeps home sales happening and stability in the market.

  3. Jeff Brown

    I get it, Joshua, but I’m referring to borrowers with 750-800+ FICO, not a ding in sight, much less a foreclosure or short sale. Furthermore, in addition to their prudent down payments, they often have cash reserves in the six figures. Their ‘backend ratios’ are often 10-25%. Not sure where the relative lender risk resides in a loan to that investor. This is especially true when they come to the table with the aforementioned qualifications, plus $20-40K/yr in cash flow.

    We’re both preachin’ to the choir here, but not lending to these type buyers, while opening doors for 650 FICO FHA buyers makes about as much sense as what got us into this mess in the first place.

      • The 10-loan limit is the hurdle we can’t get over. We are forced to seek alternative solutions, like credit leasing (requires bringing in a partner), commercial loans (higher rates, shorter period of time), portfolio lending (higher rates), and other options which tend to have higher rates and shorter terms than the 30 year option. The 30-year, lowest-rate-you-can-possibly-find is off the table due to a hard, arbitrary limit, regardless of how good your credit and cash flows are.

        • Yeah, the 10 limit would stop you, if you wanted to hold a lot of mortgages. I dont’ see that going away anytime soon, sorry. If there is an update on this I will announce it right away. Perhaps, using multiple investors to finance a porfolio of properties is an idea. Say, 3 investors finance 10 properties each, which would give you 30 properties/mortgages. I’m sure you thought of this, but just a thought.

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