3 Reasons QE3 Won't Help Housing

Ever since the Federal Reserve announced its newest incarnation of quantitative easing last week, the media has been abuzz with speculation. Will it help create jobs? Will the program, as Bernanke remarked at the public announcement, push mortgage rates down further, thereby adding some spark to the nascent housing recovery?

Opinions abound on both points, particularly the latter. I personally side with the crew that predicts an almost imperceptible effect on the housing market, and here are some reasons why.

1. Banks aren't interested in stepping up mortgage writing. According to a report in the Financial Times, banks are already behind in the mortgage-writing department, and don't plan to hire additional staff to help process additional work. QE3 will help bloat prices of mortgage-backed securities, though, which will increase banks' profits through MBS sales. This has helped buoy stock prices of big banks like JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , Citigroup, and Wells Fargo (NYSE: WFC  ) . Of the group, Wells Fargo commands nearly one-third of the mortgage-writing business and should benefit the most from the current open-ended MBS buying spree.

Knowing this, there seems no incentive for banks to relax tight lending standards that have hamstrung many buyers. A recent report showed that more than half of all new loans written last month were sold to buyers with credit scores greater than 740 -- compared to 41% during the early 2000s. Even FHA rules seem to be tightening up: Despite the official line that prime loans start with a credit score of 660, the average score tallied for loan denials was 669, versus the 2001 average of 656.

2. Loans won't really become any cheaper. With banks being busy as bees and backed up with new and refinanced loan paperwork, there is no reason to expect them to pass on any lower rates to borrowers they don't want to see in the first place. With some banks, like Bank of America, stepping back from mortgage originations, competition is not fierce in the industry -- and, as some have noted, banks aren't required to offer rock-bottom rates to consumers.

Even if rates do drop, it will take months for the effects of QE3 to trickle down to borrowers, and it may not be enough to make a difference. An analyst from PNC Financial (NYSE: PNC  ) predicts 30-year rates to fall to 3.5% by year's end, and probably another quarter percent beyond that, because of quantitative easing.

There's another reason banks don't want to lower interest rates for borrowers, and it has to do with MBS sales. The New York Times notes that banks make much more on bundled mortgage securities containing loans with higher interest rates, and they don't plan to change that scenario anytime soon. Banks claim that increased regulation ratchets up their costs, hence their reluctance to offer lower rates. Wells Fargo, JP Morgan and US Bancorp (NYSE: USB  ) have all reported higher income so far this year from these fees, so it's easy to see why banks want to keep rates higher.

Since September 9 or so, borrowers have also been assessed another mortgage loan expense, courtesy of Fannie Mae and Freddie Mac. That's because the "guarantee fee" on FHA loans is increasing by 10 basis points, adding approximately 0.125% to the average mortgage rate. The g-fee, which is assessed to ameliorate servicing costs of MBS products, actually takes effect on loans delivered by November 1 -- hence the early appearance. This fee has been rising a little bit each year since 2010 and represents the FHA's efforts to encourage more participation by the private sector in the mortgage market by making Fannie and Freddie less competitive.

3. Buying a home is cheaper than renting, yet housing sales are still stagnant. A recent report by Trulia shows that buying is now 45% cheaper than renting in 100 U.S. markets, and rents have risen 4.7% since one year ago August -- while home prices have gone up only 2.3%. Mortgage rates fell, too, to a near-historic low of around 3.5%. Will another quarter-point drop in mortgage interest rates really make much of a difference? If all the other benefits aren't causing hordes of homebuyers to come out of the woodwork, then it doesn't seem likely.

What will spark a housing market revival?
It seems clear that the only thing that will really encourage banks to loan more is higher interest rates. Meanwhile, for consumers to feel comfortable enough to jump back into the home buying market, the jobs picture must improve -- and only when employment picks up will interest rates be able to rise. Certainly, job creation is the major impetus behind QE3, as the Fed has vowed to keep it up until the employment numbers look livelier.

The idea, of course, is to bolster the stock market by dampening returns on MBS products. This, in turn, should goose investment, providing capital for companies to grow -- and, ostensibly, hire workers. At the same time, average householders will supposedly feel less financially cramped and more willing to spend.

The big question is: Will it work? Time will tell, and the Fed is committed to staying the course until the economy cries uncle and starts to liven up. For stocks, jobs and housing, let's hope that the third time really is a charm.

While Bank of America isn't currently dabbling in the mortgage-writing market, it has other things going for it that financial investors should know about. If you would like to discover all the risks and opportunities facing this banking giant, access our premium report on B of A by clicking right here.

Fool contributor Amanda Alix owns no shares in the companies mentioned above.

The Motley Fool owns shares of Bank of America, Wells Fargo, JPMorgan Chase, PNC Financial Services, and Citigroup. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2025039, ~/Articles/ArticleHandler.aspx, 11/23/2014 7:37:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement