The Fed’s QE: Help or Hindrance to Lending?By Rob Chrisman,
Industry Outlook, Rob Chrisman's Perspectives, Secondary Markets, Uncategorized
Over the last several years the residential lending industry has lamented practically every change. Y2K, LO comp, QM, TRID, the list goes on and on, and yet borrowers continue borrowing and lending keep lending. One interesting topic among economists is whether or not QE impacted lending, and if it did, how?
It will probably take economists another decade to really delve into and quantify, what has taken place economically over the last seven years….it’s certainly fodder for the next generation of PhD dissertations. Prior to the financial crisis many academic economists I talked with were hard pressed to adequately explain the circular flow of mortgage banking; this is not the case today. As an industry, mortgage banking was, and still is, a very important catalyst for the macro economy, and we are just now starting to see its significant role and impact in the recovery years leading out of 2008. Specifically, the Quantitative Easing programs, its role in encouraging the refinance market, and the overall regional economic impact of the program. On the whole, income inequality is not something that the Federal Reserve generally worries about when setting monetary policy. Historically, its goals center on price stability and ensuring some form of “full employment“. Nevertheless, it is important to understand how monetary policy affected regional inequality, an inequality which was driven by way of mortgage rates and banking.
The Federal Reserve announced QE1 in late November of 2008. It had very specific goals: supporting the housing and financial markets by way of large scale asset purchases. The announcement of the program set off wide spread buying in the TBA markets, and within a month mortgage rates had fallen by almost one percentage point. How did originators fair? According to historical indexes, aggregate mortgage origination activity (primarily R/T refinancing) increased by almost $100 billion in December of 2008. This was an almost threefold relative to the months before the announcement. The impact of this number needs better understanding and historical significance, but as any loan officer will inform a prospective borrower, a lower-rate mortgage increases the borrower’s disposable income. It is safe to assume that the increase in disposable income garnered by the mass refinancings, also contributed as a stimulus to the overall economy. But the question the Federal Reserve has been asking is whether or not this benefit was equally distributed throughout the marketplace.
It was not. We now see that the increase in refinancing activity was much stronger in some areas of the country than in others. Specifically, on the aggregate, homeowners with little-to-no equity after housing prices sold off benefited the least from lower interest rates. Also, homeowners with combined loan-to-values greater than 80 percent were in the same locations that had suffered large increases in unemployment over the previous two years. It’s no surprise to anyone working in mortgage banking that these areas, the ones hit the hardest from declining home prices and unemployment, were Arizona, California, Florida, and Nevada. The inability to refinance, specifically cash-out refinances during this initial period of 2008/09, either due to lack of equity, or lack of employment, contributed to an estimated $10 Billion disparity in savings between areas of the country who could, or could not, benefit from QE1.
The Federal Reserve encountered a situation where their transmission of monetary policy, through the mortgage market, was impeded by systemic differences in borrower and regional attributes. Moving forward, such monetary policy decisions (which were the subject of a Federal Reserve Bank of New York recent conference) are currently being revisited through an historical eye. Maybe changes to mortgage products are the answer? The prevailing thought process assumes, on the aggregate, that most mortgages have fixed rates, and a borrower needs to qualify for a new loan in order to refinance. We now know that this is something not every borrower is afforded, and something which impacts regions differently. However, if more borrowers had adjustable-rate loans, they would have automatically benefited from a decrease in rates, and the increase in dispersion might not have occurred to the extent I described above.
Clients of STRATMOR continue to see lending wax and wane for various reasons. We’re accustomed to it, right? Changes in weather, interest rates, the influx of foreign buyers, and so on all impact lending. The Fed’s Quantitative Easing certainly impacted lending through its impact on interest rates. And for that lenders are very thankful.