The Federal Reserve signaled Wednesday that the Trump administration’s ambitious plan to inject $200 billion into the mortgage-backed securities (MBS) market via Fannie Mae and Freddie Mac is unlikely to significantly boost mortgage refinancing activity, even as it may modestly lower yields. The assessment, detailed in minutes from the Fed’s January meeting, casts doubt on the potential for the initiative to deliver substantial relief to homeowners facing high borrowing costs.
The administration’s strategy centers on having the government-sponsored enterprises (GSEs) purchase a substantial volume of MBS, aiming to reduce mortgage rates and increase access to homeownership. However, Fed officials indicated that while the purchases could compress yields on mortgage bonds, the impact on actual mortgage rates – and therefore refinancing – is expected to be limited. The primary constraint remains persistently high mortgage rates, a broader macroeconomic issue not easily addressed by targeted GSE activity.
This skepticism arrives alongside growing commentary questioning the efficacy of the administration’s approach. Former Freddie Mac CEO Donald Layton, who led the GSE from to , recently delivered a sharp critique of the proposals. Layton argued that Fannie Mae and Freddie Mac are fundamentally unsuited to address the core problem plaguing the housing market: a severe shortage of supply. “If you’re in the administration, [and] you want to do things at the federal level about supply, the GSEs better not be at the heart of your effort, because they’re not well positioned,” Layton stated in a virtual forum earlier this month, according to reports. He emphasized that the GSEs are designed as demand-side tools, providing liquidity and stability to the mortgage market, not as instruments for increasing housing stock.
Layton’s assessment aligns with analysis from the Realtor.com® economic research team, which estimates a national housing shortage of roughly 4 million units. This supply deficit is widely considered the primary driver of high home prices and, elevated mortgage rates. Simply lowering borrowing costs, experts suggest, will only exacerbate demand without addressing the underlying lack of available homes.
The Fed minutes also suggest that the administration’s proposals regarding guarantee fees – potentially slashing them to lower mortgage costs – and the introduction of longer-term mortgages, such as 50-year loans, are viewed with caution. While these measures could offer some marginal benefits, officials believe their impact will be overshadowed by broader economic forces and the fundamental supply-demand imbalance.
The administration has also floated the idea of backing assumable or portable mortgages, allowing buyers to take over existing loans. Layton, however, questioned the practicality of such a system, given the complexities of modern mortgage contracts and the potential for adverse selection.
The limited expected impact on refinancing is particularly noteworthy. Many homeowners who might benefit from lower rates are already locked into existing mortgages, and the administration’s plan appears unlikely to generate enough downward pressure on rates to incentivize widespread refinancing. This contrasts with previous periods of quantitative easing by the Federal Reserve, where large-scale asset purchases had a more pronounced effect on broader interest rates.
The situation is further complicated by the current monetary policy environment. With the Federal Reserve holding rates steady, and future rate cuts appearing less certain, the potential for significant declines in mortgage rates is constrained. The administration’s efforts to influence the MBS market are therefore operating within a broader context of tighter monetary conditions.
The focus on Fannie Mae and Freddie Mac also raises questions about the long-term health of the GSEs. Both entities remain in government conservatorship following the financial crisis, and their future remains uncertain. Using them as tools to address broader economic challenges could potentially jeopardize their ongoing stability and complicate efforts to eventually return them to private ownership.
Analysts at Seeking Alpha noted that the Fed minutes indicated the $200 billion MBS plan may cut yields but won’t boost refinancing much as mortgage rates stay high. This reinforces the idea that the administration’s strategy is a limited solution to a complex problem. The core issue, as Layton and others have pointed out, is not simply the cost of borrowing, but the availability of homes. Addressing this requires a more comprehensive approach focused on increasing housing supply, potentially through zoning reforms, incentives for developers, and investments in affordable housing initiatives.
The administration’s proposals, while politically appealing, appear increasingly likely to fall short of their stated goals. The Fed’s assessment, coupled with expert critiques, suggests that a more fundamental and supply-side oriented approach is needed to address the ongoing housing affordability crisis.
