During a National Association for Business Economics (NABE) conference in Philadelphia, Fed Chair Jerome Powell admitted they maybe went too far buying up mortgage-backed securities a few years ago.
The Fed’s controversial purchases of MBS led to the lowest mortgage rates on record, with the 30-year fixed falling to 2.65% in early 2021.
While the move was apparently intended to “ease broader financial conditions” we all know it led to a massive home buying frenzy.
And it came at a time when housing affordability was already at a tipping point.
But instead of easing conditions, it led to home prices roughly 50% higher in many markets nationwide, creating an even bigger housing crisis.
Should the Fed Have Stopped MBS Purchases Earlier?
Powell told attendees at the NABE conference yesterday that they maybe shouldn’t have carried out that final round of Quantitative Easing (QE) during the pandemic years.
“With the clarity of hindsight, we could have and perhaps should have stopped asset purchases sooner,” he said.
Adding that “Our real-time decisions were intended to serve as insurance against downside risks.”
Now it would be unfair to go after Powell here because the pandemic was an unprecedented time and extreme measures were taken.
But it does seem painfully obvious that we didn’t need record low mortgage rates during that time.
The 30-year fixed was already quite low in early 2020, averaging around 3.75%. Speaking of hindsight, I’m sure anyone would jump at a rate that low today.
In March 2020, the Fed announced its final round of QE, pledging to increase “its holdings of agency mortgage-backed securities by at least $200 billion.”
The argument at the time was that agency MBS were “central to the flow of credit to households and businesses.”
Sure, we should always have a functioning mortgage market, but did we need the 30-year fixed to go from 3.75% down to nearly 2.50%?
Probably not, and with the benefit of hindsight, we know it created even bigger problems for the housing market.
Aside from it arguably leading to significantly higher home prices (some markets went up another 50% or so), there’s also the matter of mortgage rate lock-in.
Pandemic-Era Mortgage Savings Are Locked In for Another 25 Years
The problem with artificially suppressing mortgage rates is that it’s not just temporary.
The most common mortgage type in the United States is far and away the 30-year fixed-rate mortgage.
As the name implies, you get a fixed interest rate for a full 30 years (the entire loan term).
So the Fed’s purchases of MBS during 2020 that pushed rates to all-time lows by 2021 will remain until the year 2050, assuming the borrower keeps the mortgage.
While it perhaps should have been temporary relief for homeowners (and home buyers), the Fed provided relief for the next 30 years.
It’s great for the haves, but awful for the have nots.
We now have a weird dynamic known as the mortgage rate lock-in effect, where the gap between outstanding rates and today’s market rates is huge.
For example, a homeowner with a 2.75% 30-year fixed now faces a rate of say 6.25% or higher if they were to move.
This locks them into their property, thereby exacerbating the housing market’s problems even more.
There’s even fewer available homes for sale because there’s a lot less willingness to sell and face massive payment shock.
Powell also said, “We would certainly not engage in mortgage-backed security purchases as a way of addressing, uh, mortgage rates or housing directly, that’s not what we do.”
While also saying, “We do have, as I mentioned, a very large amount of mortgage-backed securities…”
So he’s basically acknowledging that it’s not in their toolbox moving forward, even though it was in the past.
They will NO LONGER buy MBS as it seems to have exacerbated problems already present in the housing market.
In other words, don’t expect the Fed to help lower mortgage rates again. Look at typical market dynamics instead, like economic data for future rate movement.
If you want lower mortgage rates, root for a slowing economy, not another Fed “bailout.”
Just one caveat though. While Powell admitted it was a tool used in the past, though apparently not to lower mortgage rates, it probably won’t be in the future, at least with him at the helm
Though that’s kind of the rub…would a new look Fed run back QE and let the housing market “cook” again?
(photo: Kevin Dooley)
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.