What President Trump can do about mortgage rates

President Donald Trump is pursuing direct interventions to lower residential mortgage rates by directing Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities. This strategy emerges as geopolitical instability has pushed Treasury yields and mortgage coupons higher, creating a need for more aggressive yield curve management. Industry analysts argue that using the GSEs as conduits to retire low-coupon debt may be more effective than traditional Federal Reserve actions in restoring market liquidity and reducing borrowing costs.

The residential mortgage market is facing significant upward pressure as 10-year Treasury yields have risen nearly 50 basis points due to the US-Israeli conflict with Iran, subsequently dragging 30-year fixed-rate mortgage coupons higher. In response, President Donald Trump has directed FHFA Director Bill Pulte to authorize the GSEs to purchase $200 billion in mortgage-backed securities (MBS). While the Federal Reserve’s previous quantitative easing efforts between 2020 and 2022 successfully lowered rates at the time, those actions created a massive volume of low-coupon debt that is now illiquid and trading at deep discounts, which industry experts argue is currently driving interest rates higher.

Market data underscores the stagnation caused by these legacy assets, with the Ginnie Mae Capital Markets Report showing the weighted average coupon on $3.2 trillion in outstanding MBS barely moving to 4.08% by early 2026. Scott Buchta of Brean Capital notes that Fannie Mae and Freddie Mac’s current market activities have helped compress spreads by about 25 basis points, but their retained portfolios of roughly $150 billion each are struggling to grow as lending volumes decline. The GSEs are currently absorbing negative convexity and managing growing duration gaps, yet their impact is limited because they are primarily buying and holding current coupon securities rather than addressing the overhang of low-coupon debt.

To more effectively lower mortgage rates, the administration is being urged to transition the GSEs toward a large-scale repurchase model similar to the U.S. Treasury’s buyback program, which retired over $300 billion in low-coupon debt by late 2025. By aggressively tendering for trillions of dollars in discounted agency and government MBS, Fannie Mae and Freddie Mac could remove these long-duration securities from the secondary market. This strategy would leverage the GSEs' power as hyper-efficient issuers to enhance market liquidity and structurally lower interest rates for the residential sector, offering a more targeted alternative to traditional Federal Reserve interventions.