Fed's Latest Stimulus May Have Little Impact on Mortgage Borrowers

September 26, 2012

As the Federal Reserve attempts a new round of quantitative easing, there is hope that it will reboot the housing market and stimulate the entire economy. The Fed has announced its plan to buy $40 billion worth of mortgage bonds per month as a method of providing support for the housing sector, says the Washington Post.

But, the Fed's policy is unlikely to have much of an impact on mortgage rates.

  • The Fed can't directly intervene with consumers; rather they must rely on banks and brokers as well as other industries to give borrowers better terms.
  • As a result, banks will keep rates high because lowering them will overwhelm them with customers.
  • Furthermore, it may take months or longer for benefits to trickle down to customers.
  • Finally, people that want to take advantage of low mortgage rates can't take advantage of them because their poor credit history disqualifies them.

Critics say that the banks will simply take advantage of this to maximize profits. Banks continue to charge the same interest rates for home loans but pay less to investors who finance the loans by buying mortgage securities.

The most likely scenario is that the lower rates will create additional refinancing. Some say that the refinancing boom will burn out since everyone who qualifies for a lower mortgage would have refinanced already. In any case, if refinancing activity dies out, the Fed believes that the demand for new homes will climb as confidence in the housing market increases.

Source: Danielle Douglas and Brady Dennis, "Fed's Latest Stimulus May Have Little Impact on Mortgage Borrowers," Washington Post, September 18, 2012.

 

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