Q: Did the Fed do anything else Wednesday?

A: Yes, it said it will reinvest the proceeds from its $900-billion portfolio of mortgage-backed securities into new mortgage-backed securities. That is also intended to keep mortgage rates low.

Detroit Free Press

More Money Chasing Houses

The Fed announced today that they would start buying mortgage backed securities (MBS) again.

My first reaction was that this could be a pretty big deal for the housing market and I was surprised that there weren’t more stories about it. This program will pump a lot more money (it turns out, $900 billion) into the housing market. We’ll have a lot more money chasing houses.

That additional demand for MBS from the Fed may lower mortgage interest rates a little bit which is good for sales but mortgage rates are already so low I don’t expect a big bump in sales from even lower rates.

Lower Lending Standards?

On the other hand, for lenders to sell more MBS to the Fed lenders will need to create more MBS. And the only way I can see that lenders can create a lot more MBS is for lenders to bring their lending standards back down to earth.

You do remember, I hope, during the real estate boom that lenders were doing anything to create more MBS to sell and their efforts mainly consisted of giving loans to anyone (see also, “Stated Income – Stated Assets” loans, aka, Liar’s Loans).

Now, I’m not saying we should go back to those crazy fraud-filled days, I’m just saying that the higher the demand for MBS, the lower the lending standards have tended to be (all other things being equal).

Cheap But Not Easy

Right now money is cheap but not easy. Interest rates are super low but it’s hard to get a loan. You have to have excellent credit to be able to qualify for a loan and to be able to take advantage of the low interest rates.

So I can see one scenario where this program causes mortgage lenders to lower their high lending standards, and that leads to more people who are able to get loans, and that leads to more money chasing after real estate, and that leads to higher home prices.

Advertisements