How will QE3 help keep mortgage interest low

By Ken Go

RECENTLY, the Federal Reserve announced a third round of “quantitative easing,” or QE3, to stimulate the economy. So let’s do a quick run through of what that means. How pumping more money into the system will help us short term, not long term.

This is the third time the Federal Reserves trying to stimulate the otherwise struggling economy.

Normally, when there’s a recession or the economy is limping along, the Federal Reserve will reduce short-term interest rates in order to spur more lending and spending. But right now, the Fed has cut interest rates as far as they can go and the economy is still struggling. This is known as the “zero bound.” The Fed can’t go any lower.

So, instead, the central bank can try quantitative easing. Since the Federal Reserve can just create dollars out of thin air, it can buy up assets like long-term Treasuries or mortgage-backed securities from commercial banks and other institutions. This pumps money into the U.S. economy and reduces long-term interest rates further. When long-term interest rates go down, investors have more incentive to spend their money now. In theory.

Did QE1 and QE2 actually help boost the U.S. economy?

The first round of quantitative easing appeared to be effective in preventing the economy from sinking into a giant depression. Economists say this was because everyone realized the Fed would do whatever it takes to avoid deflation. It was essentially a giant confidence boost. The economy stopped sliding and inflation slowly rose. But the effects seemed to dwindle as the years went by. Experts are much more divided on how much QE2 has helped.

In theory, quantitative easing should work in two ways. First, it injects more cash into banks, allowing them to lend more. And second, it lowers interest rates — if the Fed buys up a bunch of mortgage-backed securities, for example, that should make it cheaper to borrow money to buy a house. In practice, interest rates do drop. But it’s hard to figure out whether this translates into a boost in the actual economy. After all, low mortgage rates can only do so much if banks are scarred by the housing bubble and remain tightfisted about lending.

How will I benefit from this QE3?

Refinance your current mortgage rate to these unbelievable low rates now. If you are buying, you will be able to get FHA insured loans for under 5% down or you can certainly avail of these low 30 year mortgage rates that are between 3.25% – 3.5%. Call for loan quotes.

How will this help mortgage interest rate and banks allowing more loans?

When the cost of money becomes cheap like it is now, the banks will have no choice but to sell money at a discount. Meaning mortgaging lenders will buy the monies at a low price so they can turn around and sell it cheap too. For Example: Fannie Mae and Freddie Mac are two main sources for all mortgage money going around. If they are able to borrow these monies cheap like for examples around 3% or less, they can turn around and sell it for .25% profit. In Return you will get your mortgage loan for just a tad over 3.5% like how it is today. Believe me most everyone who can qualify has taken advantage of this rate either for refinancing or purchasing.

What we need to complete the lower rates is for the bank to ease up on their guidelines and make it easy for more homeowners, first time buyers to qualify for a home loan.

So what does this mean for me?

I know I mentioned “Cash is King”. On the savings front, it’s low yields as far as the eye can see. Savers can expect extremely low rates on savings accounts, money market accounts and certificates of deposit for the next three years.

Will the billions spent on mortgages help me?

Maybe. That’s the plan, anyway. When the central bank buys securities, it pushes more money into the financial system. The hope is that all that liquidity will help banks make more loans, so consumers can buy houses and cars and TVs and give money to companies who will then buy equipment and hire more employees.

“We have seen, over the past year and a half, an increase in bank lending after a long period of contraction in bank balance sheets, so the banks have more cash on hand, and then they lend more of it out,” says Sam Coffin, economist at UBS, a global investment bank headquartered in Switzerland. Unlike previous easing attempts, the Fed will be focusing mainly on the housing market in QE3.

Normally, it would help keep those interest rates lower, so you would hope that it would start to bring people back into the housing market. But the problem is that if you are uncertain about your job and uncertain about your financial situation, you’re simply not going to buy another house.

About 18 percent of mortgages are underwater; there are millions of Americans who are simply waiting for their home values to appreciate more before they even think of selling their home.

Word of the year: Uncertainty

The fate of the economy and the millions of unemployed workers may ultimately hinge, not on monetary policy, but on the federal government.

Make sure you exercise your right to vote this November.

Thanks for your inquiries and comments, please call Ken Go of 1st Innovative Finance Group at 562-697-7028 or write to