Was quantitative easing successful? That question will be answered and unanswered hundreds if not thousands of times over the coming decades.
But regardless of how history judges the experiment, there's one company that has every reason to thank the Federal Reserve's decision to pursue it: Wells Fargo (NYSE:WFC).
As the nation's largest mortgage originator, the California-based lender was positioned from the start to profit from the central bank's efforts to boost the housing market. And the specific contours of the Fed's three successive rounds of quantitative easing only added to this.
Starting in 2009, the Fed began purchasing billions of dollars' worth of mortgage-backed securities every month. It did so in order to reduce MBS yields, which, in turn, would filter down and cause mortgage rates themselves to fall.
In the third and final wave of easing, the Fed purchased a staggering 29% of all agency MBSes issued by Fannie Mae and Freddie Mac.
To say that this strategy was effective would be an understatement. In four years, the interest rate on 30-year fixed-rate mortgages dropped from 6% in the second half of 2008 all the way down to 3.4% by the end of 2012.
But while this may not have had an immediately noticeable impact on the housing market itself, the same cannot be said for the mortgage market, which surged with activity after the drop in rates. The source of the activity was existing homeowners seeking to refinance existing loans.
Prior to 2009, between 40% and 50% of total mortgage originations refinanced existing obligations while the majority financed home purchases. After interest rates dropped, however, this relationship reversed.
Given the other things that were going on in the housing market at the time -- namely, soaring delinquencies and foreclosures -- this turned out to be a much-appreciated boon for banks. This is because mortgage lenders generate noninterest income from originating loans, packaging them into fixed-income securities, and then selling the securities to institutional investors.
And no single bank was in a better position to take advantage of this than Wells Fargo, which underwrites a third of all mortgages in the United States. Between 2009 and the middle of last year, a full 70% of its mortgage applications stemmed from requests to refinance. Typically, the share is closer to 50%.
Over this same time period, moreover, it earned $32 billion from the origination and sale of mortgages. Consequently, if you assume that 20% of that figure relates to the Fed's aggressive drive to lower interest rates, then Wells Fargo had upwards of 6 billion reasons to be thankful for quantitative easing.
Going forward, moreover, Wells Fargo's willingness to widely entertain requests to refinance helped the company consolidate its commanding lead in the mortgage market and generated an annuitylike income stream from monthly servicing fees on all of the now-refinanced home loans.
In short, while one can argue all day long about the broader benefits and detriments of quantitative easing, there's no doubt that the policy materially boosted Wells Fargo's earnings over the last five years and will continue to do so in the years to come.