QE3: Good for Homeowners, but Better for Banks
Mortgage applications spiked nearly 17% last week after interest rates touched another record low. As of Sept. 27, the rate for a 30-year mortgage was 3.4%.
According the Mortgage Bankers Association's Weekly Application Survey, refinancing hit a level not seen since April 2009.
The news of increased mortgage activity is very much tied to the Federal Reserve's open-ended QE3 program announced in mid-September and its pledge to keep interest rates low through mid-2015.
"Financial markets continue to adjust to QE3, as the ongoing presence of the Federal Reserve as a significant buyer of mortgage-backed securities applies downward pressure on rates," said Mike Fratantoni, MBA's Vice President of Research and Economics.
This is certainly good news for the U.S. housing market as more Americans take advantage of historically low interest rates. Additionally, when Americans spend less on their mortgages, they have more money to spend on other things.
This is what the Fed wanted and we are seeing "tangible evidence" of that, says The Daily Ticker's Henry Blodget in the accompanying interview.
Homeowners are not the only beneficiary of QE3. Banks are increasing their bottom line as more homeowners refinance or apply for new home loans.
The Financial Times reported the following on Monday:
"The interest banks pay on mortgage bonds has dropped from 2.36% on September 12, the day before the Fed announced its program, to as low as 1.65% last week. It edged up to 1.85% on Monday.
That means the profit, or spread, banks earn from creating new mortgages for homeowners paying around 3.4% and selling the loans into the secondary market has risen to around 1.6%. That is higher than the 1.44% spread they pocketed before QE3 and significantly greater than the 0.5% they earned on average in the decade between 2000 and 2010."
Banks argue that they need to charge more to process the influx of applications. But The Daily Ticker's Aaron Task is shocked that banks are earning more now per mortgage than they did during the housing boom.
Task also fears that we could see a repeat of the most recent financial crisis which was sparked by a similar low interest rate environment.
Are you shocked too? Tell us what you think! Should there be a way to help the average American without helping the big banks out too?
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