Home mortgage rates are not anticipated to "’naturally’ come down very much, as the Federal Reserve’s resumed easing cycle is unlikely to drive down 10-year U.S. government yields sharply, according to analysts at Wolfe Research.
In a note, the strategists flagged that, against this backdrop, there has been "increasingly intense speculation" about steps the Fed or government-sponsored enterprises like Fannie Mae or Freddie Mac could take to push down mortgage spreads, including by possibly raising their holdings of mortgage-backed securities (MBS).
The Wolfe analysts predicted that the Fed would probably opt not to scale down an ongoing runoff of MBS from its balance sheet soon because this would "be contrary" to Fed Chair Jerome Powell’s goal of normalizing financial market liquidity. Since 2022, the Fed has been drawing down the size of its holdings after more than doubling its balance sheet to roughly $9 trillion during the COVID-19 pandemic.
"That leaves the [government-sponsored enterprises] as the more realistic route for the [Trump] Administration to intervene in mortgage markets," the Wolfe analysts led by Tobin Marcus wrote.
They argued that White House has the legal authority for a major program of MBS purchases through GSEs such as Fannie and Freddie, noting that the entities could absorb well over $1 trillion in the securities if the government were to remove pre-existing limits on their retained portfolios.
Although the analysts warned that they have not received "any direct indication from sources" in Washington that this kind of program is on the way, "it’s plausible that the Administration could go this route in an effort to tackle housing affordability."
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