Why The Fed's Plan To Save The Housing Market Isn't Working That Well

When the Fed announced QE-infinity in September, it said it would purchase $40 billion of mortgage backed securities per month.  The aim was to lower the mortgage rates offered to consumers.

But there’s been some concern that this hasn’t passed through to the real economy. 

In a note titled “Mortgage Originators Not Playing Nice”, TD Securities economist Gennadiy Goldberg writes that average decline in mortgage rates (the interest on a mortgage) since the QE3 decision have lagged the decline in mortgage-backed securities (MBS) rates by an average of 50 per cent. Remember, MBS rates refer to the rates at which a pool of mortgages are sold to investors in the bond market.

mortgage spread QE3 chartThe difference between MBS yields and mortgage rates

Photo: TD Securities

Goldberg explains that there are three factors behind the weak pass-through:

  • Lag: Mortgage rates often respond slower to policy changes than the MBS market. “In a similar pattern to what was observed following the previous QE announcements, MBS yields fell more sharply post-announcement, as mortgage rates continued to adjust lower slowly.”
  • Banks: Pass through peaked at 66 per cent during the third week after the announcement. “Since the TD SecuritiesQE3 announcement, our calculations suggest that banks have passed through an average of just 40% of their lower funding rates (i.e. lower MBS yields) in the form of lower mortgage rates.”
  • Fees: Higher mortgage fees have slowed the pass through but this is lower than historical levels.

That being said, Goldberg does think the Fed’s moves to lower mortgage rates will help the housing recovery. Now they just have to get mortgage bankers and brokers get on board.

SEE ALSO: Forget All The Housing Comeback Talk – Here’s Why The Market Is Still A Disaster >

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