Is The Fed's QE Working?

Includes: FMCC, FNMA, JPM, WFC
by: John M. Mason

Is the Federal Reserve finally starting to experience some positive outcomes from it efforts at quantitative easing? Earlier this week my post examined how the current thrust in the third round of quantitative easing is aimed at creating more activity in the housing market.

The policy initiative just announced on September 13, 2012 states that the Fed intends to purchase $40 billion of agency mortgage-backed securities for an indefinite period of time. But, earlier periods of quantitative easing have seemingly worked through to the housing market and several housing market indicators are indicating some increased activity taking place.

For example, housing prices are now increasing in many markets. For example, CoreLogic (NYSE:CLGX), a company that provides information on real estate activity, indicated that home prices in the United States increased by 5 percent in September, year-over-year. This is the largest year-over-year increase in six years. As mentioned above, QE3 was just getting started in September so it could not have contributed to this rise.

Now we are getting some other information. Freddie Mac (NYSE:FMC) has just posted its fourth straight quarterly net profit. See "U.S. Housing Recovery Boosts Freddie Mac." Freddie Mac made $2.9 billion in the third quarter, up from a $7.0 billion loss in the third quarter of 2011. And, the company now has a net worth of $4.9 billion after it paid the U. S. Treasury a required $1.8 billion dividend. This is the second quarter that Freddie Mac has not requested a bailout from the government.

"The company's reserves for potential losses are easing as bubble-era mortgages are written off and higher-quality post-2008 home loans now comprise 60 per cent of its portfolio. Its bad loan reserves represent about a quarter of its soured mortgages, down from 32 per cent at the end of last year."

Furthermore, Freddie Mac "said its serious delinquency rate - which it defines as loans at least three months past due or in foreclosure - on loans originated since 2008 was 0.37 per cent as of the end of the quarter. The equivalent rate on loans originated between 2005 and 2008 stood at 9.38 percent."

Fannie Mae (OTCQB:FNMA) will report its third quarter results in coming days.

I believe that this is just what the Federal Reserve is shooting for. By buying agency mortgage-backed securities the Fed is creating an environment where Freddie Mac- and Fannie Mae-backed securities have a buoyant market so that financial institutions can feel confident that mortgages that they will initiate can be bundled and sold off into the capital markets.

With Freddie Mac, and hopefully, Fannie Mae becoming more financially stable, confidence in the whole system can rise and this will, hopefully, increase the amount of mortgage financing going on across the economy.

This effort, however, does not necessarily help the small- and medium-sized banks. As I have written in a recent post "It seems as if many of the largest banks in the country are benefiting from an increase in mortgage lending. Both Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM), along with several of the other larger banks in the United States, posted strong earnings. The strength of these earnings have been attributed to their creation (and sale) of many new mortgages."

I know that many smaller banks are in some way affiliated with a mortgage broker who will originate mortgage loans and then immediately place them with Wells Fargo or JPMorgan or some other large bank. These banks usually get a fee for this activity but never see or hold the mortgage itself. They are not big enough to afford a mortgage department; they do not want to hold onto the mortgages, given all the troubles in the industry in the past; and they do not want to have the resources and expertise to package them and sell them off to someone else.

Still, their customers are served and the housing market obtains more funds. This is the mortgage market in 2012.

For the Federal Reserve and for the economy, however, the specific structure is not important. The important thing is to get the housing market going again.

In this respect, quantitative easing seems to be having an effect. QE3 is a more focused effort to push more money into the housing market and, given what seems to be a positive beginning, it seems to be having some success.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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