Mortgage Rates Are in Washington’s Crosshairs With a $200 Billion Plan

What Happened 

The White House announced Thursday that it will direct Fannie Mae and Freddie Mac, government-sponsored enterprises that support the housing market by buying home loans from lenders, to purchase $200 billion in mortgage bonds.

The companies will use reserves accumulated since entering federal conservatorship during the 2008 financial crisis, with the stated goal of lowering mortgage rates and monthly payments for American homebuyers and homeowners seeking to refinance. 

Fannie Mae and Freddie Mac have quietly stockpiled mortgage-backed securities (MBS), which are financial products created by pooling mortgages and selling shares of the cash flows. Their combined retained portfolio grew 31% from May to October, reaching $233.6 billion, the highest in four years. 

The new directive accelerates an existing strategy rather than starting a new approach. The two companies typically buy residential mortgages from lenders and either hold them or bundle them into MBS, which they then sell to investors. By retaining more assets rather than selling them, they reduce the supply available to investors, which could affect pricing and influence the interest rates lenders offer to borrowers.

Why It Matters 

Housing affordability has reached crisis levels nationwide. Mortgage rates are averaging 6.2%, a significant burden compared to the sub-3% rates available during the pandemic. The Federal Reserve previously bought mortgage bonds during crises to push rates lower, enabling millions of homeowners to refinance at historically low rates.

This sets a precedent for government intervention meaningfully affecting borrowing costs, though the impact of Fannie and Freddie buying bonds differs, as both are already deeply embedded in the mortgage market.

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The strategy carries its own risks, as the plan would spend cash reserves meant to buffer Fannie Mae and Freddie Mac, government-sponsored enterprises that support the U.S. mortgage market, against an economic downturn like the Great Recession.

This means betting that housing markets will remain stable and that no major crisis will emerge requiring those reserves to cover losses on guaranteed mortgages.

The approach also raises questions about whether rates will actually decline in response to these purchases. Mortgage rates do not move in simple lockstep with mortgage bond prices.

Rather, they reflect a complex mix of factors, including long-term Treasury yields (the interest the government pays to borrow money for more than 10 years), inflation expectations, lender profit margins, and investor demand for mortgage-backed securities.

How It Affects You 

If bond purchases lower mortgage rates by 0.25-0.5%, the effect on your monthly payment could be significant, depending on your loan size. For instance, a drop from 6.2% to 5.7% on a $400,000 mortgage could save about $120 per month or $43,000 over thirty years.

Homeowners with mortgages from 2020-2021 likely have rates of 2-4%, and even a reduction to mid-5% likely does not justify refinancing for them. However, those who bought or refinanced in the past two years at 7-8% rates could find a move to 5.5-6% attractive for refinancing.

Uncertainty remains about when, or if, rates will decline. This challenges anyone who is house hunting. You might wait for better rates, but risk missing the homes you want or quick price jumps. Historical data shows that trying to perfectly time rates is usually less effective than buying the right property, and you can always refinance if rates improve significantly.

Depleting Fannie Mae and Freddie Mac’s cash reserves to chase lower interest rates means those government-backed mortgage companies have less financial cushion to absorb losses if home prices fall or a recession triggers a wave of mortgage payment defaults.

The government would almost certainly step in to prevent a collapse of the mortgage market, but that intervention would come at taxpayer expense. It could also lead to stricter rules for who can qualify for a home loan, making it harder to get a mortgage in the future.

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