In recent times, two major government-backed housing finance institutions in the United States have significantly increased their retained investment portfolios, sparking speculation in the market about a potential decline in mortgage rates.
According to a report by Bloomberg on Monday, Fannie Mae and Freddie Mac have seen their holdings of mortgage-backed securities (MBS) and housing loan portfolios (held for themselves rather than sold to investors) increase by over $50 billion over the past five months ending in October, representing a growth rate of more than 25%.
The current total MBS holdings of these two companies have reached $234 billion, the highest level since 2021. Analysts estimate that Fannie Mae and Freddie Mac may further increase their holdings by $100 billion in mortgage-backed securities by 2026, although there is still significant room within the government-imposed limits set after the 2008 financial crisis.
Market observers believe that the Trump administration may be using the strategy of increasing MBS holdings to retain more loans rather than selling them off, thus reducing market supply, supporting prices, lowering yields, and decreasing mortgage borrowing rates. Additionally, the interventions by these two major buyers help in suppressing volatility and reducing investors’ risk assessment during this process.
Vitaliy Liberman, portfolio manager at DoubleLine Capital, said that one of the most direct ways to reduce mortgage rates is to instruct Fannie Mae and Freddie Mac to purchase more mortgage-backed bonds. He believes that the current administration is considering all options to lower mortgage rates.
The US institutional MBS market currently stands at around $9 trillion. Since taking office in January, the Trump administration has repeatedly stated its intention to use the financial strength of Fannie Mae and Freddie Mac to reduce housing costs.
Bill Pulte, director of the Federal Housing Finance Agency (FHFA), mentioned that they are exploring the introduction of 50-year mortgage loans to alleviate monthly payment burdens.
During the 1990s to the early 2000s, in order to achieve the government’s affordable housing goals (such as providing loans to low-income individuals), Fannie Mae and Freddie Mac gradually lowered loan standards and purchased large amounts of high-risk loans such as subprime and Alt-A.
The housing market collapse during 2007-2008, with a sharp decline in house prices leading to numerous defaults, resulted in significant losses for both companies, which held or guaranteed around $5.3 trillion in mortgage loans. Their losses were substantial, with multi-billion losses in 2008 alone, eventually leading to bankruptcy proceedings.
On September 7, 2008, the Federal Housing Finance Agency placed both companies under government supervision and set strict limits on the size of their assets holdings. At the same time, the Treasury Department mandated that the two companies reduce their MBS holdings, with a reduction target set to $158 billion by the end of 2022.
Since the Federal Reserve began raising target interest rates to curb inflation from 2022, mortgage rates have remained high. Currently, the average rate for a 30-year home loan is still above 6%.
Over the five months leading up to October, the MBS assets held by Fannie Mae and Freddie Mac increased by over $50 billion. Despite this, the companies’ asset sizes are still over $200 billion lower than the limit, indicating there is still ample room for future growth.
Analysts point out that due to a lack of official explanations, Wall Street can only speculate on the factors driving this change and how much more assets Fannie Mae and Freddie Mac may increase next year.
CitiGroup predicts that Fannie Mae and Freddie Mac could increase their MBS holdings by around $100 billion in 2026, potentially reaching $250 billion. The bank estimates that this could reduce the risk premium on MBS by about 0.25 percentage points, with some or all of the reduction reflecting in the lowered mortgage rates for consumers.
Walt Schmidt, a strategist at FHN Financial, mentioned that since the Treasury Department still holds a significant amount of shares in Fannie Mae and Freddie Mac, the government continues to exert considerable influence over them.
Schmidt told Bloomberg, “This gives the government a flexible tool to lower consumer rates, similar to the Fed’s approach.” Since 2022, the Federal Reserve has been gradually divesting its MBS holdings.
Some analysts also believe that the government’s actions may pave the way for Fannie Mae and Freddie Mac to end nearly 20 years of regulation and return to the public marketplace.