A new proposal is floating around that could push mortgage rates even lower than they already are.
In case you haven’t noticed, the 30-year fixed is back in the low 6s and even knocking on the door to the 5s.
While that’s actually pretty good and below the long-run average of 7.75% historically, housing affordability remains quite poor.
The quickest and easiest way to improve affordability is through lower mortgage rates, even if home prices are still too “high.”
One relatively easy solution is to get Fannie Mae and Freddie Mac to buy mortgage-backed securities (MBS) to lower rate spreads.
Tighter Spreads Can Lower Mortgage Rates Even More
Over the past few years, mortgage rate spreads have been bloated relative to the 10-year Treasury yield.
Historically, the 30-year fixed is priced roughly 170 basis points (bps) above the prevailing 10-year bond yield.
For example, if the 10-year yield were 4% today, the 30-year fixed might be 5.70%.
Lately however, this spread has widened due to things like prepayment risk and also a reduced MBS appetite from investors.
Over the past century, there has always been a big MBS buyer, whether it was the Federal Reserve and its Quantitative Easing (QE) or Fannie and Freddie prior to the early 2000s mortgage crisis.
However, Fannie and Freddie (collectively the GSEs), saw their portfolios capped post mortgage-crisis once they entered government conservatorship. They basically couldn’t take on more risk.
As it stands now, the pair are allowed to own $450 billion in MBS, or $225 billion each.
But they only hold about $204 billion combined, meaning there’s room to purchase $246 billion more to reduce MBS supply and increase MBS prices.
Doing so would lower mortgage rates as less supply of MBS means its price rises (and associated mortgage interest rates can fall).
A new plea for the GSEs to get buying has been proposed by the Independent Community Bankers of America (ICBA) and Community Home Lenders of America (CHLA).
In a letter to Treasury Secretary Scott Bessent and Federal Housing Finance Agency (FHFA) director William Pulte, they recommended that each GSE “have the ability to purchase up to $300B of MBS for when the 30/10 spread is above 170 basis points.”
At the moment, the spread is roughly 220 bps, meaning it’s about 50 bps above “normal.”
GSE MBS Buying Could Push Mortgage Rates Back Into the 5s
The two trade groups argue that addressing this issue “could reduce mortgage rates by 30 basis points or more.”
So where would that put the 30-year fixed? Well, based on today’s rate of 6.17% from Mortgage News Daily, we could drop to say 5.875%.
That would certainly get some prospective home buyers excited, and also lead to a huge increase in rate and term refinance activity for recent buyers.
As I pointed out a while back, five million refinances hinge on mortgage rates getting back to 5.5%.
It would provide a lot of monthly payment relief for homeowners and bolster the economy, as the pair pointed out in their letter that “housing accounts for nearly 20 percent of GDP.”
The possible downsides though are that we just get into another quasi-QE situation where everyone expects someone to come in and rescue mortgage rates whenever they get “too high.”
Arguably, they’re already at reasonable levels, having fallen from 8% in late 2023 to just over 6% today.
And they appear to be on an even lower-rate trajectory with the possibility of the 5s even without a new, large MBS buyer.
The historical average for the 30-year fixed is 7.75% and we’re already well below that. Do the GSEs need to take additional risks or just let the market function on its own?
It’d be one thing if we needed to stabilize the mortgage market and provide emergency liquidity to keep things running.
But this seems more about just lowering mortgage rates because they aren’t as attractive as they necessarily could be.
By the way, mortgage rate spreads have also come in a ton since growing as wide as 325 bps in recent years, so there’s already been progress there too!
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.