September 14th, 2012 11:56 AM by Gregg Mower
What in the world is QE3 and what does it mean to me? This is the Federal Reserve Bank or the “FED” agreeing to buy more mortgage backed securities from banks. Ok I know I just lost you again. This news we hear sometimes sounds so sexy and good but the average person on the street has no idea what it might mean for them or to them. In this case it is the Government attempting to stimulate the economy by ageing to buy mortgage loans from lenders. This is designed to make banks feel secure enough to do loans first of all as they would have a place to sell them and recapitalize, or put simply make money. It will also lower interest rate on long term loans in an attempted to get those companies out there an incentive to borrow money to expand their operations and get more people employed.
When looking at this attempt one must remember that this whole idea of the Government intervening into private business is just a theory and may not work. If you can wrap your brain around a theory (which means logically it should work) then you have a good start on understanding how government thinks. The problem is, that these loans are being purchased by us the American people with the theory that Americans will make their house payments in a low interest rate environment. If we go through another round of weak employment and job loss the Government will be stuck with the bad debt instead of private industry. The first go around with the mortgage crisis hit private industry and we saw big companies like Lehman Brothers go out of business as they chose to make poor lending decisions. If this were to happen to our government we would end up like Greece or Spain basically bankrupt. The value of our dollar would be worthless and inflation would go crazy. So it should not be treat lightly taking on private citizen’s debt.
As for the mortgage industry we are seeing the effect immediately with lower rates. Today’s interest rates just move to the low 3’s. This is great, however, not everyone can qualify for these low rates. You see as interest rates go down underwriting of those loans becomes tougher. What this means is that you make have a 4.5 interest rate qualified for that loan last year and now with the new underwriting guidelines stiffening up you may not qualify for the 3.25 interest rate. Don’t get me wrong , as a Mortgage professional I love the low rates, I just want to inject some reality into what people are hearing from media, one must remember we are in an election year as well. Other effects we are seeing are the government fees increasing to lenders, as we saw “gfees” go up .10% this week ahead of the Fed’s announcement of QE3. This means that the rebate on higher interest rates have decreased, or put in human terms, I you take a higher interest rate to pay for your closing costs the amount that will be given to pay for those costs will be less.
So QE 3 will it work? That will be for history to sort out, but in the short run it is lowering interest rates on home loans and that is good for those currently looking to refinance or buy another home. To see today’s rates Click here.