The president Donald Trump has ordered Fannie Mae and Freddie Mac to launch a massive moratorium on buying mortgage-backed securities to lower mortgage rates, but experts doubt the move will have much of an impact.
Trump, on Jan. 8, said he would ask Fannie and Freddie, which have been under federal control since the 2008 bailout, to buy up to $200 billion worth of securities (MBS), which would nearly double their combined holdings and put them close to the legal limit.
“This will lower your Mortgage Rates, LOWER your monthly payments, and make the cost of owning a home more affordable,” Trump promised in his Social Truth book.
Mortgage rates responded well to the news, with the 30-year daily rate falling below 6% on Friday for the first time in nearly three years.
In theory, increasing the holdings of Fannie and Freddie’s MBS should allow loan rates to rise through the simple laws of supply and demand. Increased demand for loans makes them more valuable, encouraging lenders to originate more loans at competitive rates.
However, with the total US market for mortgage bonds estimated at $12 trillion, it is unclear whether Trump’s proposed $200 billion in purchases will be enough to make much of a difference.
“Details remain limited, but it’s hard to see this proposal moving mortgage rates in a big or lasting way,” said Realtor.com® chief economist. Joel Berner. “A single infusion of nearly $200 billion, or even a series of smaller purchases totaling that amount, is unlikely to meaningfully change long-term mortgage rates.”
For context, US commercial banks currently hold approximately $2.7 trillion in MBS. And the Federal Reserve still holds more than $2 trillion in mortgage bonds, three years after the central bank began reducing its holdings of MBS.
Although the Fed does not sell MBS, about $15 billion of central bank bonds mature and come off the balance sheet each month.
Mortgage Bankers Association Chief Economist Mike Fratantoni says there isn’t enough data on the proposed purchases of Fannie and Freddie to have a clear sense of the market impact.
“The timing and speed and the financing used to make these purchases can be significant. However, it is likely to put downward pressure on the spread of real estate,” said Fratantoni. “Especially at a time when the Federal Reserve continues to allow its holdings of MBS to lapse, these purchases could go a long way.”
Currently, Shannon McGahnthe National Association of Realtors® senior vice president and chief advocacy officer, says, “President Trump’s plan to buy $200 billion in mortgage-backed securities (MBS) will help address the high spread between mortgage rates and Treasury yields and help lower costs for American families.”
“In 2023, the National Association of Realtors joined others in the industry to urge the association’s leaders to take limited action to support the MBS market to reduce the high cost of housing that has been costing many people to own homes,” McGahn said.
“Today’s announcement demonstrates the kind of market-strengthening policy we have championed. We stand ready to work with the Administration to ensure it delivers real relief for homebuyers and the broader housing market.”
The purchase would take Fannie and Freddie closer to peak holdings
Fannie and Freddie buy mortgage loans to put into investment vehicles known as mortgage-backed securities, which they often sell to investors. This helps ensure the right investment demand for mortgages, bringing liquidity and stability to the market.
These two companies definitely hold some MBS on their balance sheets, either as part of a pre-sale pipeline, or as a supplement to cash flow by collecting interest payments directly, instead of guarantee fees paid by lenders.
Before 2008, Fannie and Freddie ballooned their combined capital to more than $1.5 trillion as a way to get juice, by borrowing heavily at low interest rates and plowing money into high-yield debt and riskier assets.
That strategy backfired in the subprime mortgage crisis, which blew up their balance sheets with huge amounts of credit losses, necessitating a federal bailout that put Fannie and Freddie into conservatorship.
Under tougher bailout rules, two government-sponsored securities firms (GSEs) were forced to reduce their reserve portfolios and refinance.
“As we’ve come out of the financial crisis, and in every policy debate over the last few decades, there’s been widespread agreement that the GSEs should not go back to having the balance sheets they had before the crisis,” Fratantoni said. “Liquidity challenges and the constraints they faced with such large mortgage positions ended up disrupting the market.
“It would be important that any additional purchasing activity be done carefully with these concerns in mind,” he adds.
Since May, Fannie and Freddie have both been quietly increasing their combined income, reaching a four-year high of $247 billion in November.
Trump’s plan would take those shares up to about $450 billion, which is the maximum amount of regulation at Fannie and Freddie, which is currently limited to $225 billion each in mortgage assets.
In theory, the Federal Housing Finance Agency, which regulates Fannie and Freddie, could raise those balance sheets, but the FHFA Director. Bill Pulte he dismissed that suggestion in an interview with CNBC on Friday.
“Well, $200 billion is a lot, a lot of money. This is a very big purchase. We’re very excited about it. We’ve already started doing it,” Pulte said.
Trump continues to focus on mortgage rates to fix affordability
Trump’s plan for Fannie and Freddie continues to focus on affordable mortgages as the primary solution to the housing affordability crisis, after he recently admitted he didn’t want to lower mortgage rates.
Trump said last month that he wants to ensure that current homeowners continue to have “greater value in their home,” a goal he has acknowledged conflicts with his desire to increase home ownership for more young people.
If housing prices remain stagnant or continue to rise, the only way to afford them is with rising incomes and falling mortgage rates.
A recent analysis by Realtor.com found that mortgage rates would need to drop to 2.65% to restore the relative housing affordability seen in 2019, when mortgage payments required about 21% of household income.
Income would need to increase by 56% to return the market to affordable levels by 2019.
“Overall, while the goal of improving affordability is widely shared, policies that fail to address resource scarcity are unlikely to deliver significant or lasting relief,” Berner said. “Sustained progress depends on adding homes through new construction and expanded inventory in markets with chronic constraints, rather than short-term interventions that fundamentally change demand.”
