How FHFA Could Lower Mortgage Rates in 2025: A Look at GSE MBS Purchases

Background

A scenario we are prepping for at Tomo is the event of Fannie Mae and Freddie Mac (the GSEs) stepping into the market to buy Mortgage Backed Securities, causing a sudden drop in mortgage rates this year, in 2025. Such a move could result in a drop in mortgage rates by as much as half a percent. The spread between the 30-year fixed mortgage rate and the 10-year Treasury yield remains unusually wide, hovering around 2.3 versus a historical average of ~1.7 percentage points (Mind the Gap Between Mortgage Rates and the 10-Year Treasury Yield) (A Look at the Relationship Between the 10-Year Treasury and 30-Year Mortgage Rate | Builder Magazine). This elevated spread illustrates investor uncertainty, reduced liquidity in mortgage-backed securities (MBS) markets, and the withdrawal of major buyers like the Federal Reserve.

In his first week leading the regulator of Fannie and Freddie, the Federal Housing Finance Agency (FHFA) Bill Pulte has shown himself to be an activist, aggressive Director, having fired the boards of the two GSEs and appointed himself as Chairman of both. With the Trump Administration hungry to prove that it is “lowering rates” we see intervention by the GSEs to be the most sure path to claiming such a victory. Absent an independent board, the two GSEs are now conduits for directives from the Trump Administration.

This analysis will demonstrate that the GSE’s have the precedent, authority, and capital to create a sudden move down in mortgage rates, by purchasing MBS and compressing the elevated spread between Treasuries and Mortgages.

Historical Role of Fannie Mae and Freddie Mac in Stabilizing Mortgage Spreads

GSE Mandate and Past Interventions: Fannie Mae and Freddie Mac were created to provide stability and liquidity in the mortgage market. Historically, they have influenced mortgage rates not just by guaranteeing loans, but also by purchasing MBS for their own portfolios, thereby supporting MBS prices and keeping yields (and thus mortgage rates) lower. Important to note, they can do this under their current charter and independent of any other regulatory body; there is no Act of Congress or Federal Reserve vote needed for the GSEs to conduct purchasing operations to lower interest rates. See below for some historical examples.

• 1998 (LTCM Crisis): During a liquidity crunch in fall 1998, Fannie and Freddie “came to the rescue of the mortgage bond market, buying a massive amount of ‘agency’ MBS” to stem a dramatic price decline (Agency MBS succumbs to global credit squeeze | Reuters). This intervention was credited with tightening widened MBS spreads back toward normal levels.
• 2007–2008 (Housing Bust): As private investors shunned mortgage bonds in the subprime crisis, policymakers looked to the GSEs for support. In late 2007, Senate Banking Chair Chris Dodd urged lifting regulatory portfolio caps so the GSEs could buy more MBS and “provide a bid to the market that could cause spreads to tighten,” as one analyst noted (Agency MBS succumbs to global credit squeeze | Reuters). FHFA’s predecessor (OFHEO) eventually did relax constraints: in March 2008 it announced a plan to inject up to $200 billion of immediate liquidity by allowing Fannie and Freddie to expand their MBS portfolios (OFHEO, Fannie Mae and Freddie Mac Announce Initiative to Increase Mortgage Market Liquidity | FHFA). OFHEO cut the GSEs’ capital surcharge and lifted portfolio growth limits, expecting the GSEs to purchase or guarantee up to $2 trillion in mortgages that year (OFHEO, Fannie Mae and Freddie Mac Announce Initiative to Increase Mortgage Market Liquidity | FHFA). This move explicitly aimed to stabilize a gapping mortgage-Treasury spread. (Notably, by September 2008 the GSEs fell into conservatorship, but their expanded buying earlier that year provided interim market support).
• Post-2008 Regime: After the 2008 crisis, the GSEs’ ability to conduct large-scale MBS purchases was sharply curtailed by regulators and law. Under the terms of the federal conservatorship and Treasury support agreements, Fannie and Freddie were required to shrink their retained portfolios from near $850 billion each to no more than $250 billion by 2018 and they are currently limited at $225 billion each. Since 2008 Fannie and Freddie have not been used as market buyers to influence spreads – that role was largely taken up by the Federal Reserve’s quantitative easing, as discussed below. That being said, there is no blocker to the GSE re-entering the market up to the current $225 billion caps today.

GSEs’ Current Capital vs. Recent MBS Supply Levels

Any renewed buying of MBS by Fannie and Freddie must be viewed in light of their capital resources and the scale of the market. We believe they do have enough capital and portfolio space to significantly influence the MBS market today. The GSEs remain in conservatorship but have been allowed to rebuild capital in recent years by retaining earnings. Both enterprises are much better capitalized now than a decade ago, though still below the levels needed for full privatized status.

• Fannie/Freddie Capital: As of year-end 2024, Fannie Mae’s net worth was $94.7 billion (up 22% from a year prior) and Freddie Mac’s was $59.6 billion (up 25%) (Fannie Mae And Freddie Mac’s Combined Net Worths Climb To $154B – Inman). Combined, they hold roughly $154 billion in equity capital. Consider this their “dry powder” that could be used to intervene in the MBS market.
• Net GSE MBS Issuance: The size of the MBS market is often described in terms of “net issuance”–the total value of new MBS issued, minus the value of mortgages that have been paid down through amortization or refinance. Consider this net number the new supply that must be absorbed by the market to keep the Mortgage<>Treasury spread in equilibrium. The volume of net new MBS issued by Fannie and Freddie has slowed dramatically over the past two years, driven by lower refinance and purchase volume in a high-rate environment. Based on the February 2025 Ginnie Mae Global Market Analysis report, the “GSE Total” net issuance (i.e., the combined net issuance of Fannie Mae and Freddie Mac MBS) for 2024 was just $38 billion, and less than $100 billion projected in 2025.
  

This subdued level of net issuance, significantly lower than the $885 billion peak seen in 2021, presents a strategic window: intervening in a low-supply environment requires less capital to influence spreads. If the GSEs were to purchase even $50–100 billion of MBS over the course of the year, it could represent a meaningful portion of total net issuance and provide a stabilizing bid, especially if coordinated or communicated clearly to the market.

Importantly, this amount is within both constraints of (1) Total Capital Available as well as the (2) the applicable regulations that put a limit on total portfolio holdings (see further discussion below).

A limited, targeted buying program could impact spreads at the margin by sending a strong demand signal. For context, during the 2008 crisis the Treasury allowed Fannie and Freddie to each temporarily grow their portfolios by about $50 billion/month (Federal takeover of Fannie Mae and Freddie Mac – Wikipedia). And in 1998, the market impact was achieved by an estimated ~$10–15 billion surge in GSE purchases in a short period (exact figures were not disclosed, but “massive” relative to normal volumes (Agency MBS succumbs to global credit squeeze | Reuters). Today’s market is larger, so a meaningful intervention might require on the order of $50–100 billion in purchases – which is a substantial but potentially doable effort if phased over time and if FHFA/Treasury permit leveraging the GSEs’ still-strong debt market access.

Outlook: Can FHFA Drive Spreads Lower via GSE MBS Purchases?

Director Pulte’s Options: In principle, FHFA Director Bill Pulte could authorize Fannie Mae and Freddie Mac to purchase more conforming MBS on the open market, aiming to provide additional demand and narrow the mortgage-Treasury spread. Historically, such moves have precedent in crises (as shown in Section 1).  In today’s context, the case for action is that mortgage spreads remain abnormally wide – penalizing homebuyers with higher rates – and private demand alone has been insufficient to normalize the gap. By leaning on the GSEs’ balance sheets, FHFA might replicate some of the stabilizing force that the Fed or other big buyers provided in the past. The market net issuance is small relative to both the (1) Capital base of the GSEs and (2) the $225 billion cap on portfolio holdings mandated by the Treasury’s Preferred Stock Purchase Agreement imposed when the two GSEs went into conservatorship. Both Fannie and Freddie hold ~$86 billion of portfolio securities at the end of 2024.

We see Director Pulte at a policy crossroads, where such an intervention could provide significant relief to homeowners and the housing industry. As of the date of writing, a normalization of Treasury/Mortgage spreads would lower 30yr fixed mortgage rates into the 5s for many customers and potentially lead to an unlock of housing inventory. Such an action would capture headlines and boost the approval of the current Administration. 

On the other hand, this kind of intervention would make an exit from conservatorship more difficult, a goal that’s been clearly stated by the Trump Administration and is popular in conservative circles. With ~$154 billion in net worth, the GSEs do have some capacity to take on more assets, especially given their strong earnings in recent years. But to appreciably tighten the mortgage spread, the GSEs might need to buy on the order of tens of billions of MBS – which could use up a notable chunk of their capital under current leverage ratios. For example, a $50 billion purchase program might be conceivable (perhaps a split of $25B each), over a number of months should the spread remain abnormally wide. While the risk-weighted capital impact to holding MBS is far less than the cash actually deployed to do so, each tranche of MBS purchased would pull the GSEs further from their target number for an exit. The current capital target for the GSEs is approximately $300 billion to exit from conservatorship. 

Tomo is leaning towards an intervention by Director Pulte and the FHFA ahead of peak purchase season. We believe the short term victory on the most headline of interest rates would be too hard for the Administration to pass up. Furthermore a limited intervention but the spectre of more may be enough to tighten the Mortgage/Treasury spread without a massive deployment of capital.  

Sources:

1. FHFA / OFHEO news releases and policy statements on GSE portfolio limits and liquidity measures (OFHEO, Fannie Mae and Freddie Mac Announce Initiative to Increase Mortgage Market Liquidity | FHFA) (Federal takeover of Fannie Mae and Freddie Mac – Wikipedia).
2. Fannie Mae and Freddie Mac financial results (2024 net worth and capital) (Fannie Mae And Freddie Mac’s Combined Net Worths Climb To $154B – Inman); Fannie Mae 2025 statements.
3. Ginnie Mae Global Markets Analysis Report (Dec 2023, Dec 2024) for agency MBS net issuance data (Ginnie Mae Design Features) (Ginnie Mae Design Features).
4. Federal Reserve Bank analyses on MBS purchases: Dallas Fed Economics (2021) (Fed’s mortgage-backed securities purchases sought calm, accommodation during pandemic – Dallasfed.org) (Fed’s mortgage-backed securities purchases sought calm, accommodation during pandemic – Dallasfed.org); Richmond Fed Economic Brief (2020); Fed Board staff note (2024) (The Fed – The Evolution of the Federal Reserve’s Agency MBS Holdings).
5. Freddie Mac PMMS data on historical mortgage rates; Urban Institute (Feb 2025) for mortgage spread trends (PowerPoint Presentation) (PowerPoint Presentation).
6. Academic research on QE impacts: Forbes (MIT Sloan, 2024) ().
7. News outlets (Reuters, HousingWire, Inman) for historical accounts of GSE interventions and current leadership policies (Agency MBS succumbs to global credit squeeze | Reuters) (Agency MBS succumbs to global credit squeeze | Reuters).
8. Annual reports for Fannie Mae and Freddie Mac

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.