What Is Quantitative Tightening?

What Is Quantitative Tightening? | SmartAsset.com

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In the past two years, investors have taken an unusual interest in the Federal Reserve Bank. That’s mostly due to a Fed policy known as ‘quantitative tightening’, or QT. Effectively, QT was the Fed’s attempt to reduce its holdings after it bought huge amounts of debt during the 2008 Great Recession. While some details will interest only economists, QT  may have implications for financial markets and regular investors. It’s useful to explore the backstory, but a financial advisor can be helpful if you’re concerned about how Fed activity can impact your investments,.

What is Quantitative Tightening?

To understand quantitative tightening, it’s helpful to define another term, which is quantitative easing. To do that, we need to go back to the bad days of 2008.

When the Great Recession hit, the Fed slashed interest rates to stimulate the economy. But it was evident that wasn’t nearly enough to stave off crisis. So the Fed provided another jolt of stimulus by buying Treasury bonds, mortgage-backed securities and other assets in huge volume. This combination of slashing interests rates massive government spending was qualitative easing, or QE, and fortunately it worked. Banks had more cash and could continue to lend, and more lending led to more spending. Slowly, the economy recovered.

But in the meantime, QE exploded the Fed’s balance sheet, which is a tally of the bank’s liabilities and assets. Prior to the crisis, the balance sheet totaled about $925 billion. With all the purchased debt, which the Fed categorized as assets, the balance sheet ballooned to $4.5 trillion by 2017. Years past the financial crisis and with a strong economy, the Fed decided to shrink its balance sheet by shedding some of its accumulated assets, effectively reversing QE.

That reversal is quantitative tightening. QE had poured money into the economy, and through quantitative tightening, the Fed planned to take some of that money out again. First it raised interest rates, which it had plummeted to zero during the financial crisis. Then, it began retiring some of the debt it held by paying off maturing bonds. Instead of  replacing these bonds with new debt purchases, the Fed stood pat and let its stockpile shrink. This effectively reduced the quantity of money under bank control, thus quantitative tightening.

Did Qualitative Tightening Officially End?

There was no official beginning or end to quantitative tightening. The Fed began to ‘normalize’ its balance sheet by raising interest rates in December 2015, the first hike in nearly a decade. In October 2017, it began to reduce its hoard of bonds by as much as $50 billion per month. But after four 2018 interest rate cuts and some stock market downturns, many observers worried the Fed aggressive normalization was too much of a shock to the economy.

In response, the Fed ended the interest rate hikes and slowed down on debt retirement. By March 2019, the cap on reductions reduced from $30 billion a month to $15 billion. By October 2019, the Fed announced it would once again start expanding its balance sheet by buying up to $60 billion in Treasury bills a month.

However, the Fed insisted this was not another round of quantitative easing. Some market observers reacted to that announcement with skepticism. But whether this was or wasn’t a new round of QE, the Fed’s action effectively stopped quantitative tightening.

How Quantitative Tightening Impacts Markets

Many investors worry that quantitative tightening would negatively impact markets. During the past decade, returns have shown a relatively high correlation with the Fed’s purchases. Conversely, the Fed’s selloff of assets was a contributing factor to the market dip in late 2018, which left the S&P 500 about 20% below its top price.

Quantitative tightening definitely made some investors nervous. That said, there are a few things to consider if the Fed shrinks the balance sheet in the future. First, it’s unlikely the balance sheet will contract to its pre-2008 level. The Fed hasn’t indicated where a ‘happy medium’ might be, but the balance sheet remained well about the pre-2008 figures when expansion began again in October 2019.

Additionally, it’s unlikely that quantitative tightening will reverse quantitative easing’s impact on long-term interest rates. In part, the Fed purchased long-term bonds and mortgage-backed securities to move money into other areas, like corporate bonds, and lower borrowing costs. Also, the Fed hoped this activity would encourage the productive use of capital. According to the Fed’s research, the use of quantitative easing reduced yields on 10-year treasury bonds by 50, to 100 basis points (bps).

While quantitative tightening may have reversed some of this impact, experts believe it will not undo long-term interest rates by 100 bps. Ultimately, it comes down to the comparative impact of the expansion and contraction of the balance sheet. In October 2019, the contraction was not nearly sufficient to reverse the expansion.

Other Considerations of Quantitative Tightening

Many investors worry that quantitative tightening will have a big impact on inflation and liquidity. This is because changes in inflation and liquidity may occur when there is a discrepancy concerning supply and demand. During the financial crisis, the Fed increased the money supply since the economic system desperately needed liquidity. A decade and strong recovery later, there’s less liquidly preference. In response, the Fed has decreased  cash reserves. In a strong market, this should have no real impact on liquidity and inflation.

The Takeaway

Quantitative tightening is a monetary policy that increased interest rates and reduced the money supply in circulation by retiring some of the Fed’s debt holdings. After qualitative easing expanded the money supply for several years to bring the economy back on track, the Fed used qualitative tightening as a means to normalize its balance sheet.

While quantitative tightening did not completely reverse quantitative easing, it did shrink the Fed’s balance sheet. This strategy left many investors uneasy about future returns and interest rates. That said, balance sheet normalization did not prove to be as disruptive as many investors feared.

Tips for Investors

  • The Fed’s monetary policy quickly becomes complex, but it’s still useful for investors to keep an eye on the bank’s actions. Since interest rate changes can have direct impact on major purchases and investment plans, understanding the Fed’s reasoning for these decisions can be helpful.
  • Financial advisors can help their clients cut through the noise and translate technical analysis of market observers into plain language. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/drnadig, ©iStock.com/claffra, ©iStock.com/Duncan_Andison

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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Mortgage applications dip as rates climb

The seesaw nature of mortgage applications continued for the week ending Feb. 5, as applications decreased 4.1% from the prior week, according to the latest data from the Mortgage Bankers Association.

Applications were up 8.5% the week ending Jan. 29 – breaking a two-week stretch of decreases – before falling again last week.

Mortgage rates have increased in four of the six weeks of 2021, according to Joel Kan, MBA’s associate vice president of economic and industry forecasting, which could be causing the dip in applications.

“Jumbo rates [were] the only loan type that saw a decline last week,” Kan said. “Despite some weekly volatility, Treasury rates have been driven higher by expectations of faster economic growth as the COVID-19 vaccine rollout continues.”

The refinance index decreased 4% from the previous week but was still 46% higher year-over-year. The seasonally adjusted purchase index also decreased from one week earlier – down 5% – though the unadjusted purchase Index increased 2% compared with the prior week and was 17% higher than the same week in 2020.

The 30-year fixed mortgage rate increased to 2.96% – a high not seen since November 2020, Kan said. This has led to an uptick in refinancing, he said, as borrowers race to lock in a rate below 3%.

“Government refinance applications did buck the trend and increase, and overall activity was still 46% higher than a year ago,” he said. “Demand for refinances is still very strong this winter. Homebuyers are still very active.”

The higher-priced segment of the market continues to perform well, Kan said, with the average purchase loan sizes increasing to a survey-high of $402,200.

The FHA share of total mortgage applications increased to 9.5% from 9.1% the week prior. The VA share of total mortgage applications increased to 13.3% from 12.1% the week prior.

Here is a more detailed breakdown of this week’s mortgage application data:

  • The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 2.96% from 2.92%
  • The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) decreased to 3.11% from 3.12% – the third week in a row of decreases
  • The average contract interest rate for 30-year fixed-rate mortgages increased to 2.97% from 2.94%
  • The average contract interest rate for 15-year fixed-rate mortgages increased to 2.50% from 2.44%
  • The average contract interest rate for 5/1 ARMs increased to 2.92% from 2.88%

Source: housingwire.com

Housing, civil rights groups ask Congress for $25B

A large partnership of housing and civil rights organizations reached out on Monday to congressional leaders advocating for further relief for homeowners in the next COVID-19 stimulus package.  

The letter was signed by representatives of more than 350 housing and civil rights organizations, including American Bankers Association, Mortgage Bankers Association, National Association of Realtors, National Association of Home Builders and the Housing Policy Council, the NAACP, National Urban League, National Fair Housing Alliance and National Consumer Law Center.

The letter calls for $25 billion in direct assistance to homeowners facing hardships as a result of the COVID-19 pandemic, at least $100 million for housing counseling, and just under $40 million for the Fair Housing Initiatives Program.

Of the approximately 3.8 million homeowners past due on their mortgages, over half of them are persons of color, according to Census Bureau.

Recent homebuyers that relied on low- or no-down payment loans from FHA, VA or the Rural Housing Service are at particular risk, the group contends, noting that even six months of forbearance can put borrowers underwater on their mortgages, owing more than their home is worth.


Honest Conversations — a podcast on minority homeownership

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“Moreover, these borrowers are predominantly Black and Latinx families, first-time buyers and low to moderate-income families,” the letter says. “Mortgage payments assistance will be critically important to the nearly 3 million borrowers that remain in long-term forbearance plans from their mortgage servicers. We cannot begin to tackle the racial homeownership and wealth gaps if we do not take steps to prevent a wave of COVID-induced foreclosures and loss of home equity.”

The group is hoping the bulk of the requested $25 billion comes through the recently reintroduced Homeowner Assistance Fund, which can be used by state housing finance agencies. In the letter to Congress, the group states that the HAF can help homeowners by providing direct assistance with mortgage payments and get into affordable loan modifications, while assisting with utility payments, property tax and insurance payments, homeowner association dues and other support to prevent the loss of home equity.

The outreach from housing and civil rights groups comes at a pivotal time for the American housing industry. Recently appointed Treasury Secretary Janet Yellen has said she will play a key role in pushing the Biden administration’s economic agenda on Capitol Hill – which includes aggressive aid distribution in order to avoid an even longer recession.

President Joe Biden has repeatedly said his administration is focused on providing aid for those in need of affordable housing, and his $1.9 trillion American Rescue Plan was recently voted into the budget reconciliation process in order to speed up passage. The plan calls for an additional $30 billion in funding for emergency rental, energy and water assistance for hard-hit households, plus $5 billion in emergency assistance to people experiencing or at risk of homelessness.

All of this at a time in the country where Black homeownership has declined year-over-year, according to a recent Census Bureau report, and the percentage of Americans experiencing housing insecurity has risen to 9.5% – up from 7.2% in late 2020.

“A critical lesson of the Great Recession is that the communities most impacted need targeted, early intervention,” the group wrote in the letter. “Acting now to include these key provisions in the pending COVID-19 relief package will help stem what could be a damaging housing crisis in the U.S. concentrated in low income communities and communities of color.”

Source: housingwire.com

Can You Buy a House if You Owe Taxes?

January 23, 2020 &• 4 min read by Chris Birk Comments 16 Comments

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Disclaimer

Looking for the perfect home on the real estate market? Unfortunately, it can be tricky if you have unpaid taxes. Failing to pay your federal income taxes can lead to the Internal Revenue Service placing a lien on your property or your assets. These legal tools protect the government’s ability to get its money. They also set off alarm bells for lenders.

Can you buy a house if you owe taxes? The good news is that federal tax debt—or even a tax lien—doesn’t automatically ruin your chances of being approved for a mortgage. But you do usually have to take steps to resolve the issue before a lender will look favorably upon your mortgage application.

Can You Buy a House If You Owe Taxes?

It’s still possible, but you could have to actively work on the tax debt before a bank will approve a home loan. It might be best to pay off the lien before you fill out a loan application. But if that’s not something you’re able to do, you still might be able to forge ahead, provided you’ve actually tried to make a dent in that debt.

The specific details of your situation come into play, though. And lenders typically have slightly different requirements and documentation needs, so you’ll need to work closely with your bank or mortgage lender. If you know you have tax debt you can’t pay immediately, be honest about it so the lender can let you know what you may need to accomplish to be approved.

Can You Get an FHA Loan If You Owe Back Taxes?

Yes, you may be able to get an FHA loan even if you owe tax debt. But you’ll need to go through a manual underwriting process to make this happen. During this process, the lender looks for proof that you have a valid agreement to repay the IRS. It also requires that you have made on-time payments on this agreement for at least the last three months.

Obviously, FHA loans aren’t only contingent upon your tax debt status. You’ll also have to meet any other requirements, including those related to income and credit history.

Can Military Borrows with a Tax Lien Get a Home Loan?

Lenders can view liens differently depending on the loan type and other factors. But in general, military borrowers with a tax lien may be able to obtain VA mortgage preapproval if:

  • They have an acceptable repayment plan with the IRS and have made on-time payments for at least the last 12 consecutive months.
  • They can satisfy all debt-to-income ratio requirements with that monthly tax repayment included.
  • They note their outstanding tax lien on the standard loan application.

Can You Buy a Home If You Owe Other Types of Tax Debt?

If you owe state taxes or property taxes, you could also put your dreams for homeownership at risk. The rules vary slightly for each situation, but any type of debt you owe can cause your lender to consider you a higher-risk applicant. Even if you’re approved for the mortgage, your interest rate may be higher.

The best bet with any type of tax debt is to pay it off as quickly as possible. And if you can’t resolve it before you apply for a mortgage, at least reach out to the agency you own to make arrangements.

Research and Preparation Are Important

Whether you want to buy a home while you owe federal taxes or you’re certain your credit report is squeaky clean, take time to prepare before applying for a mortgage. You may be surprised by an error or negative item on your credit report, for example. It’s better to fix credit issues before you try to buy a home than be side-swiped by them during the process.

After taking steps to pay off or make three to 12 timely payments on your taxes, check your credit reports. Then, use your score and other information to find out what types of mortgage rates you might qualify for. This helps you understand whether or not it’s the right time to apply for a loan and buy a new home. If you’re in the market for a mortgage loan, look at the options available from the lenders on Credit.com.

The Bottom Line on Buying a Home When You Have Tax Debt

So, if you’re a prospective homebuyer with a tax lien, a good first step is making sure your track record shows at least a year’s worth of on-time payments. Pay it off in full if possible, but if that’s a tall order, know that you might have diminished purchasing power and a rockier road until the slate is clean.

In the meantime, you should also be keeping tabs on your overall financial progress by checking your credit reports regularly. You can get these reports free once a year from each of the three major credit reporting agencies, and you can get your free credit score from Credit.com.

Monitor your credit scores for increases or drops. Taking an active role in your credit can help you get on track to buy a home, especially when you’re facing certain financial hurdles such as a tax lien.


Sign up now.

Source: credit.com

What Is Mortgage Insurance?

If buying a home is your next financial goal, then you may have heard about mortgage insurance. Mortgage insurance is probably not what you expect it to be. We will cover what you need to know about mortgage insurance before you buy your future home.

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What is mortgage insurance?

Mortgage insurance is a way for lenders to protect themselves from high-risk borrowers. The mortgage payments allow lenders to compensate for any losses due to defaulting on a mortgage loan.

When you think of insurance of any kind, you typically think that the insurance would help you in times of need. Instead, this helps mortgage lenders to limit the risk from borrowers, which allows for more lending to happen.

The mortgage insurance payments protect the mortgage lender. It does not protect you in any way if you fall behind on your monthly payments.

Mortgage insurance makes the home buying process more expensive for the borrower. However, it will make it possible for some to buy a home at all. If your down payment is less than 20%, then receiving a loan with mortgage insurance attached may be the best (and only) way to secure a home loan.

How Mortgage Insurance Works

As the borrower, you would need to pay extra money to the lender as a form of insurance. The method of payment can vary by lender.

You may need to pay an upfront fee or a monthly insurance payment that is added to your mortgage payment. Some lenders may even require both an upfront fee and an additional monthly payment.

The payment amount will vary widely based on your own credit, loan amount, and ability to pay the mortgage. Typically, low-risk borrowers will be entitled to lower mortgage insurance costs. High-risk borrowers should expect to pay a higher mortgage insurance premium.

The borrow is basically paying for the privilege of borrowing the money even though the borrower has a high associated risk.

Why would I get mortgage insurance?

Borrowers are required to pay mortgage insurance if they make a down payment of less than 20% of the home purchase price. Many federal programs like the FHA and USDA loans also require mortgage insurance as a part of the loan conditions.

If you are purchasing a home through a loan, your lender may require that you purchase mortgage insurance. You may have no choice in the matter if your lender dictates that you must purchase mortgage insurance to receive the loan.

It is generally not helpful for your financial situation to sign up for mortgage insurance. If you have the option to skip mortgage insurance, then that may be a good choice, depending on your situation. Otherwise, you will be paying for your lender to be protected, but you will not gain anything in the process.

What are the common types loans that require mortgage insurance?

There are many different kinds of home loans. Each type of loan has a slightly different type of mortgage insurance associated with it for some high-risk borrowers. We will cover the most common kinds below.

Conventional Loans

Conventional loans are typically offered through private companies. Depending on your down payment amount and your credit score, the private lender may require private mortgage insurance (PMI) as a condition of the conventional loan.

The amount of private mortgage insurance will also vary based on the down payment, loan amount, and your credit history. Higher credit scores and down payments will generally lead to lower required mortgage insurance premiums.

With private mortgage insurance, the premiums are usually paid out monthly with no initial upfront fee. You may also have the ability to cancel your private mortgage insurance in certain situations.

Department of Veterans’ Affairs Loans

If you are a service member or a veteran, you have likely heard of the VA loan. The idea is to help these honorable men and women purchase homes.

The VA will back your loan, so there are no monthly mortgage insurance fees required. However, you may need to pay an upfront funding fee that will act as mortgage insurance. The initial funding fee will vary based on your military history, down payment, credit score, and several other factors.

Although the upfront funding fee is not termed as mortgage insurance, the idea is the same.

US Department of Agriculture Loans

USDA loans offer great mortgage rates meant to help low to moderate-income home buyers in rural areas. The hope is that these loans will help to infuse life back into rural areas.

The loans offer zero down payments to home buyers, but mortgage insurance is required. A USDA loan requires that you pay an upfront premium as well as monthly premiums.

Federal Housing Administration Loans

FHA loans are insured by the Federal Housing Administration but are completed through private lending companies.

FHA loans offer another low down payment option for people with lower credit scores. However, there is an enforced maximum loan limit that varies by county.

Every loan insured by the FHA requires mortgage insurance. You pay the annual mortgage insurance premium (MIP) monthly for the life of the FHA loan. The upfront and monthly mortgage insurance premium amounts vary by loan, but you can expect to pay it with FHA loans.

See also: FHA Loan Requirements for 2021

Can I avoid paying for mortgage insurance?

The easiest way to avoid mortgage insurance is by making a down payment of 20% or more. Of course, this is not feasible for every situation. Depending on your current financial picture, you may need to pay for mortgage insurance in order to purchase a home.

Alternatively, you can request to have your PMI canceled once the equity in your home reaches 20% of the purchase price or appraised value.

Bottom Line

Mortgage insurance is a required expense for many home buyers. If you are unable to make a 20% down payment on your home purchase, you will likely be required to pay for mortgage insurance.

Source: crediful.com

Working with Mortgage Brokers: Tips and Advice

The process of finding and buying a home can be complicated and stressful, but you don’t have to go it alone. A real estate agent can help you to find the right house; a mortgage broker can help you get the best deal. 

Everyone understands what the former does and why they need them, but many first-time buyers often overlook the services of a mortgage broker.

The question is, what is a mortgage broker, what services can they provide you with and should you work with one?

What is a Mortgage Broker?

A mortgage broker acts as an intermediary between you and the mortgage lender. The broker has your best interests at heart, working with the lender to help you secure the home loan you need at an interest rate you can afford.

Mortgage brokers are fully licensed and regulated. They know enough about mortgage companies to understand what makes them tick and help you secure the best rate from the many different lenders out there.

The broker will pull your credit report, gather documents pertaining to your income, creditworthiness, and affordability, and work as the middleman throughout. Once you find the best mortgage lender for you, the broker will help you file the loan application and work closely with the mortgage underwriters to ensure everything runs smoothly.

As a first-time homebuyer it can be very helpful to have someone like this on your team. It can feel like you’re entering the home loan process blindfolded, with little more than references and advice from friends and family to guide you. 

It’s not a hugely complicated process, but when it’s your first time, a lot of money is at stake, and you’re trying to juggle your everyday life with all these new demands, it can feel overwhelming.

How do They Get Paid?

A mortgage broker can be paid by the borrower, but more often than not they are paid by the lender. The mortgage lender pays the broker anywhere from 0.50% to 2.75% of the total mortgage amount on average. This means that on a $100,000 loan, the broker could be earning $500 to $2,750.

It can seem like a lot of money for one mortgage acquired for one buyer. However, once you consider all the work that goes into this process and the length of time it takes, as well as the fact that mortgage brokers are highly specialized individuals, it begins to look like a bargain. More importantly, you’re not the one paying the fees, so you don’t need to worry about them.

If you have any experience with affiliate companies or lead generation, it’s kind of the same thing, but on a much grander scale. Simply put, the mortgage lender needs customers and they get those customers through the broker, rewarding them with a small share of the profits in exchange.

Are Mortgage Brokers Fair?

You could be forgiven for thinking that mortgage brokers are only interested in earning money and will steer you down whatever path earns them the highest share. However, their only goal is to find the right mortgage rates for you and as long as you get a mortgage in the end, they won’t care. 

They’re getting paid either way and it doesn’t benefit them to focus on a single lender. They’ll look at all mortgage products and loan options; they’ll compare all lenders, and they’ll remain with you throughout the mortgage process. That’s all that matters, and you don’t need to worry about favoritism.

Mortgage Brokers vs Loan Officer

The main difference between a mortgage broker and a mortgage loan officer is that the former works as a middleman between you and the lender, while a loan officer works directly for the lender and is paid a salary by them.

A loan officer is also employed by just one mortgage lender, while a mortgage broker works with multiple lenders. 

Do I Need a Mortgage Broker?

The mortgage process can take a lot of time and it’s time that you might not have. If you’re busy and you’re going into this process blind, we recommend working with a mortgage broker or at least looking at ones in your area to see what sort of benefits they can provide you with.

In any case, whether you’re working directly with big banks and credit unions or going through a mortgage broker, it’s important to study the interest rates and closing costs closely. Are you getting cheaper rates but paying huge closing costs? Are you paying over the odds for your origination fee just to get a few fractions shaved off elsewhere?

A mortgage is something that may stay with you for several decades, and if you make a bad decision now, you could pay thousands or tens of thousands extra in that time. 

Always check the loan terms before you sign on the dotted line and commit to the home purchase. It’s also important to understand the house prices in your area and to have a good grasp of the current housing market. If there is any doubt that the market is about to go into freefall, you may be better off waiting for a year or two. 

Real estate is usually a sound investment that increases in value over time, but if you buy at the height just before a crash, that house may lose a lot of its value in a short space of time and take years to recover.

Finding a Mortgage Broker

We usually don’t advocate asking friends and family for advice when it comes to things like this. After all, the internet exists, and you can “ask” millions of people for their opinions at the press of a button, so why would you focus on one person?

However, when it comes to local mortgage brokers, this is one of the best tactics. You trust your friends and family to give you an honest opinion and when you don’t have a lot of reviews to read through and a lot of information to check, that opinion could be invaluable.

This works best if you have multiple people to ask. The problem is, many of them probably had a good experience and as they likely only worked with one mortgage broker, they’ll probably only gave that one recommendation to make. So, compare recommendations from different friends, see if any of them match, and pay more attention to the friends who have worked with several different mortgage brokers.

Source: pocketyourdollars.com