quick read
President Trump directed Fannie Mae and Freddie Mac to invest almost all of their reserves, about $200 billion, in mortgage bonds, lowering the 30-year fixed mortgage rate to 5.99%, the lowest level since September 2022. Federal Housing Finance Commissioner Bill Pelt confirmed the compliance, noting that mortgage rates depend on investor demand for mortgage-backed securities (MBS). Fannie Mae and Freddie Mac typically guarantee mortgage-backed securities (MBS) and also hold them as investments. Analysts expect the bond purchases could lower interest rates by 10 to 25 basis points, but the impact could be limited compared to the Federal Reserve’s past quantitative easing programs, which involved large MBS purchases. The bond purchases could help Fannie and Freddie go public, but experts warn that increasing MBS holdings exposes them to risks reminiscent of the 2008 financial crisis, especially if the housing market weakens.
This summary was generated by an AI tool based on the article text and checked by an editor.
While $200 billion sounds like a lot of money, the impact and duration of Fannie and Freddie’s bond purchases on mortgage rates will likely not be as great as the Federal Reserve’s.
President Trump’s promise that Fannie Mae and Freddie Mac will buy $200 billion in mortgage bonds lowered mortgage rates to their lowest level since 2023 on Friday, but it remains to be seen how much additional room rates will be lowered.
Claiming that Fannie and Freddie have amassed “absolute wealth,” President Trump announced on Truth Social Thursday that he has ordered mortgage giants to put almost all of the reserves they have amassed in recent years into mortgage bonds. This is a move that could expose the mortgage giant to losses if the housing market slumps.
“Mr. President, we’re working on it,” Federal Housing Finance Director Bill Pulte, who is also chairman of Fannie and Freddie’s board, responded at X.
The move is an acknowledgment that although the Fed cut short-term interest rates three times last year by a total of three-quarters of a percentage point, it has no direct control over mortgage rates, which are largely determined by investor demand for the mortgage-backed securities (MBS) that fund mortgages.
Demand for home purchases fell for the fifth straight week last week, hitting its lowest level since October. Mortgage interest rates have been within a range since late October and are no longer falling in sync with the Fed’s interest rate cuts.
Fannie and Freddie typically guarantee payments to MBS investors, but may also purchase and hold small amounts as investments on their own books. By increasing purchases of MBS, companies could theoretically increase the price of mortgage bonds and lower mortgage interest rates.
The mortgage giant quietly ramped up its MBS purchases in April, increasing its total mortgage portfolio by $55 billion to $233.6 billion as of October.
Thursday’s news of expanded MBS purchases was enough to push interest rates lower, with 30-year fixed mortgage rates dropping 22 basis points to 5.99% on Friday, the lowest level since September 2022, according to data tracked by Motor Gauge News Daily.
A basis point is one-hundredth of a percent, so interest rates fell by nearly a quarter of a point on Friday.
But while $200 billion may sound like a lot of money, the impact and duration of Fannie and Freddie’s mortgage bond purchases on mortgage rates may be limited.
“We expect this move to reduce mortgage rates by 10 to 15 percentage points.” [basis points]”That means interest rates could fall from 6.1% or 6.15% to 6%,” Redfin economist Chen Zhao wrote Thursday. We do not believe this will significantly reduce rates or free up large amounts of inventory. ”
The spread between MBS and Treasuries has already narrowed, and BTIG analyst Eric Hagen believes Fannie and Freddie’s bond purchases could push mortgage rates down another quarter of a percentage point if the spread returns to record lows seen when the Federal Reserve embarked on a massive quantitative easing campaign during the pandemic.
This level was reached “as a result of the Fed purchasing a net +$40 billion per month from mid-2020 through 2021,” Hagen said in a note to clients on Friday. “It’s not unrealistic for the GSEs. [Fannie and Freddie] It is also targeting $200 billion in net purchases over six months, but the timeline may depend on how much refinance activity is generated by lower mortgage rates. ”
Some analysts, including Fannie Mae’s economic forecasting team, were already expecting mortgage rates to fall this year. Therefore, there will be further downward pressure on interest rates.
TD Cowen analyst Gennady Goldberg had expected the 30-year fixed-rate loan rate to fall to 5.25% this year, but said in a note to clients that if Fannie and Freddie buy bonds in the near term, the rate could be cut another quarter of a percentage point to 5%.
Fannie and Freddie’s limited resources mean their movements in the mortgage bond market cannot match the intensity and duration of the Fed’s massive purchases of Treasury bonds and mortgages.
In the first 10 weeks of the pandemic alone, the Fed purchased $491 billion in mortgage-backed securities (MBS) and $1.57 trillion in U.S. Treasuries.
Similar to the “quantitative easing” implemented in the aftermath of the Great Recession and financial crisis of 2007-2009, the purchases were intended to prevent economic collapse by making borrowing cheaper.
The tactic worked for a while, pushing mortgage rates to historic lows, but it also drove home prices to record highs and caused inflation well above the Fed’s 2% target.
Fed balance sheet
The Fed stopped buying mortgages in 2022 and has since reduced its MBS holdings, but it still holds more than $2 trillion in mortgages.
The Fed resumed buying U.S. Treasuries in December, bringing government debt on its books to more than $4.2 trillion.
Fannie and Freddie’s net worth reaches $173 billion
Source: Fannie Mae and Freddie Mac investor disclosure documents.
Fannie and Freddie have spent nearly a decade building up their net worth and are in a position to relist on the New York Stock Exchange and allow the government to sell some of its shares later this year.
Mr. Prut told Barron’s that the purchase of mortgage bonds would not hurt prospects for a public offering because Mr. Fannie and Mr. Freddie would be able to earn more interest on their reserves invested in MBS rather than Treasuries.
However, in the event of a severe housing recession, mortgage bonds are a riskier investment than Treasuries. Fannie and Freddie’s purchases of subprime MBS helped put both companies under government conservatorship in 2008.
Buying mortgage bonds may lower interest rates “a little bit” but exposes Fannie and Freddie to “exactly the same risks that blew up” in 2008, Michael Bright, CEO of the Structured Finance Association, told Politico.
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