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April 5th, 2009 |

Author: Gavin

Lower Mortgage Rates Due To Quantitative Easing

Already low mortgage rates will probably stay low or even go lower in response to the Federal Reserve’s plan for more quantitative easing.

What is Quantitative Easing?
In the second round of quantitative easing, also known as QE2, the Fed is expected to purchase anywhere from $500 billion to $1 trillion in US Treasuries in an attempt to pump more liquidity into the financial system and drive down mortgage rates.

Purchasing massive amounts of Treasures, which are federal government debt notes, will drive their prices up. Because yields move inversely to bond prices, yields will drop. And because mortgage yields are based on Treasures, particularly the 10-year Treasury, mortgage rates will also fall, pumping money into our financial system and boosting housing markets. Both corporations and homeowners will be able to borrow at lower interest rate, and homeowners will have more money to spend after mortgage refinancing.

Inflation and Mortgage Rates
At least that’s the plan. QE2 has plenty of detractors, though, who see it as fancy words for printing money.
The tactic, some pundits warn, could end up causing problematic inflation in the long run. While homeowners and other types of borrowers will pay lower rates, savers will get smaller yields. Rates are already exceptionally low, they argue, so interest rates are not the problem.

The Fed has not exactly said it will definitely go through with QE2, but market observers are betting that it will.

A week jobs report for September increased the chances that it will happen and probably at its next policy meeting in November. Unemployment seems stuck at over 9 percent, and the Fed has said inflation is too low for its liking. Low inflation could lead to deflation in which prices keep falling, a disastrous situation the Fed wants to avoid.

Fifteen out 16 top Wall Street economists in a Reuters poll released on Friday said they think the Fed will announce its quantitative easing plan after its next policy meeting on Nov. 3. The one dissenter predicted it will announce a plan in either November or December. Homeowners planning to wait until after Nov. 3 for lower mortgage rates should keep in mind that the financial market will probably price the Fed’s expected actions into mortgage rates before its announcement.

Quantitative easing, or rather the expectation of it, is certainly helping the stock market at least in the short term and probably will keep the mortgage rates lower.

About the Author

Micheal Kling is the web editor and contributing web content writer for Total Mortgage Services, LLC, as well as all related sister sites. Total Mortgage Services, LLC is an industry leading mortgage broker and lender headquartered in Milford, Connecticut.