With the recent announcement of QE3, many are asking the question “Why?”. Here’s what I think…
QE3 is a mortgage backed security (MBS) based easing campaign. The Fed will buy $40 billion worth of MBS per month.
This should have had an immediate impact on mortgage rates, but it didn’t. Why haven’t we seen a drop in mortgage rates? Because QE3 serves two purposes…
- Keep mortgage rates at current low levels to ensure the recovery that’s taking place in the housing market continues into 2014.
- Fatten the spread between bonds and mortgage rates so government entities Fannie Mae and Freddie Mac can quickly build capital back up.
The average spread between bonds and mortgage rates has been approximately 0.75 for a few years. Now the spread has doubled to approximately 1.5. This means Fannie & Freddie make roughly twice as much when they issue guarantee bonds on bundled mortgages from banks then sell them to the Fed (after all, they are the only real buyers at these levels).
QE3 does help the housing market in the sense it keeps mortgage rates at historical lows. That said, I believe the true purpose is to helps two government entities dig themselves out of a disaster they brought onto themselves by being sloppy and irresponsible.