Trump’s promise on mortgage bonds is already causing interest rates to fall

President Trump’s promise that Fannie Mae and Freddie Mac will buy $200 billion in mortgage bonds sent mortgage rates falling to their lowest level since 2023 on Friday, but how much additional wiggle room remains to be seen.

Claiming that Fannie and Freddie have amassed “an absolute fortune.” Trump has announced Thursday in Truth Social that he has ordered the mortgage giants to put almost all the reserves they have built up in recent years into mortgage bonds – a move that could expose the mortgage giants to losses if the housing market softens.

“We are working on it, Mr. President,” Bill Pulte, director of Federal Housing Finance who also chairs the boards of Fannie and Freddie, replied to X.

The move recognizes that while the Federal Reserve 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 mortgage-backed securities (MBS) that finance most mortgages.

Homebuyer demand fell last week for a fifth week in a row to the lowest level since October, with mortgage rates having been in a range since late October and no longer falling in sync with the Fed’s rate cuts.

Fannie and Freddie typically guarantee payments to MBS investors, but also purchase and hold a small portion as investments on their own books. By ramping up MBS purchases, the companies could theoretically push mortgage bond prices up and mortgage rates down.

The mortgage giants quietly ramped up their MBS purchases in April, growing their combined mortgage portfolios by $55 billion, to $233.6 billion in October.

Thursday’s news of more and bigger MBS purchases was enough to push rates lower, with the 30-year fixed mortgage rate falling 22 basis points on Friday to 5.99 percent – the lowest since September 2022, according to data from Mortgage news daily.

A basis point is one hundredth of a percent, so interest rates fell by almost a quarter of a percentage point on Friday.

But while $200 billion sounds like a lot of money, the impact and longevity of Fannie and Freddie’s mortgage bond purchases on mortgage rates may be limited.

“We estimate that this measure will reduce mortgage interest rates by 10 to 15% [basis points]”, Redfin Economist Chen Zhao wrote Thursday. “That means rates could drop from 6.1 percent to 6.15 percent to 6 percent. We don’t expect this to massively lower rates or free up tons of inventory.”

With spreads between MBS and Treasuries already tightening, BTIG analyst Eric Hagen thinks Fannie and Freddie’s bond purchases could push mortgage rates down by another quarter of a percentage point — if spreads return to their lowest levels on record since the Federal Reserve embarked on a massive “quantitative easing” campaign during the pandemic.

Reaching that level “was the result of the Fed purchasing 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] to similarly target $200 billion in net purchases over a six-month horizon, although the timeline may depend on how much refi activity arises from the decline in mortgage rates.”

Some analysts, including Fannie Mae’s economic forecasting team, already expected mortgage rates to fall this year. Any further downward pressure on interest rates would therefore come on top of that.

TD Cowen analyst Gennadiy Goldberg, who had expected rates on 30-year fixed-rate loans to fall to 5.25 percent this year, said in a note to clients that if Fannie and Freddie made the bond purchases in a short period, they could cut rates by another quarter of a percentage point, to 5 percent.

Fannie and Freddie’s limited resources mean that the moves they make in the mortgage bond market will not match the intensity and duration of the Fed’s massive purchases of Treasury bonds and mortgages.

In the first 10 weeks The pandemic alone saw the Fed purchase $491 billion in mortgage-backed securities (MBS) and $1.57 trillion in Treasury bonds.

Like the “quantitative easing” undertaken in the aftermath of the Great Recession and the 2007-2009 financial crisis, the purchases were intended to prevent the economy from collapsing by making borrowing cheap.

The tactic worked for a while, pushing mortgage rates to all-time lows, but also pushing home prices to all-time lows record highs And letting go of inflation well above the Fed’s 2 percent target.

Fed Balance Sheet

Although the Fed stopped buying mortgages in 2022 and has since reduced its MBS holdings, it still owns more than $2 trillion in mortgages.

The Fed resumed purchases of government bonds in December, and has more than $4.2 trillion in government debt on its books.

Fannie, Freddie’s net worth is $173 billion

Fannie and Freddie have been building their wealth for nearly a decade, putting them in a position to relist on the New York Stock Exchange and for the government to sell a small portion of its stake in the companies later this year.

Pulte told Barrons that buying mortgage bonds will not hurt the prospects of a public offering, as Fannie and Freddie will earn more interest on reserves invested in MBS rather than government bonds.

But in the event of a severe housing market recession, mortgage bonds are a riskier bet than government bonds. Fannie and Freddie’s purchases of subprime MBS put the companies under state conservatorship in 2008.

While buying mortgage bonds might lower interest rates “a little bit,” it exposes Fannie and Freddie “to the exact same risks that caused them to blow up in 2008,” Michael Bright, CEO of the Structured Finance Association, told me. Politics.

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