Trumps order to buy $200 Billion Mortgage Bonds

President Trump announced that he is directing the federal government to buy $200 billion in mortgage bonds, which he claims will help lower mortgage rates and address the housing affordability crisis. This money will come from Fannie Mae and Freddie Mac, two government-backed mortgage companies.

This news led to an immediate positive reaction in the mortgage-backed securities (MBS) markets, resulting in lower mortgage rates. However, the actual impact on rates will be limited. The average 30-year fixed mortgage rate dropped to about 6%. We expect rates to fall by 10 to 15 basis points, if inflation cools. While this is a minor decrease, it won't drastically lower rates or significantly increase the number of homes available for sale. Yet.

The reason for the limited impact is that spending $200 billion on mortgage bonds is relatively small compared to past asset purchase programs. For example, during previous Quantitative Easing (QE) programs, the Federal Reserve bought much larger amounts of MBS and Treasury securities to help lower mortgage rates.

Here’s a quick look at those programs:

• QE1 (2008-2010): $300 billion in Treasuries and $600 billion in MBS
• QE2 (2010-2011): $600 billion in Treasuries, no MBS
• QE3 (2012-2014): $790 billion in Treasuries and $823 billion in MBS
• QE4 (2020-2022): $2 trillion in Treasuries and $2.5 trillion in MBS
  

Fannie Mae and Freddie Mac say they can handle such a large purchase. They have been increasing their MBS purchases recently, but whether they can add $200 billion more will depend on their available cash and how much they can hold before hitting regulatory limits.

Additionally, the President cannot direct the Federal Reserve to make these MBS purchases, as the Fed operates independently. Fed Chair Powell has previously stated that buying MBS won't solve the issue of high mortgage rates, emphasizing that the housing supply shortage is primarily responsible for the affordability crisis. The Fed has also begun to shift its focus away from MBS toward Treasury purchases.

If you had to solve for housing affordability, would you:

1. Lower mortgage rates?
2. Build more homes?
3. Tell people to make more money?

Every attempt made to increase activity can have a healthy impact on demand. People still want to buy homes, and homeownership is becoming a luxury.

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