A “For Sale” sign hangs next to a property for sale in Alhambra, California.
Frederick J. Brown | AFP | Getty Images
Mortgage rates plunged on Friday, a day after President Donald Trump said on social media that he was directing mortgage giants Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds.
“This will lower mortgage rates, lower monthly payments, and make home ownership more affordable,” he said in a post on Truth Social.
The 30-year mortgage rate fell 22 basis points to 5.99%, matching its lowest level on February 2, 2023, according to Mortgage News Daily.
Fannie Mae and Freddie, which are in government conservatorship, do not originate mortgages. They buy loans from lenders and package them into mortgage-backed securities (MBS) and sell them to investors, replenishing lenders’ funds for new loans and keeping interest rates lower and more stable for homebuyers.
The more mortgage-backed bonds and securities you buy, the lower your mortgage interest rate will be. The Federal Reserve purchased $580 billion in government MBS during the first two months of the coronavirus pandemic, amid market turmoil. After that, he continued to buy more throughout the year. From March 2020 to June 2021, the Fed increased its government MBS holdings from $1.4 trillion to $2.3 trillion, according to the Dallas Fed.
The Federal Reserve also lowered its own lending rate to zero. This combination has pushed the average interest rate on a 30-year fixed mortgage to a record low, reaching just 2.75% in early 2021, according to Mortgage News Daily.
“How big is a $200 billion deal? That depends on a number of factors, but the reaction in the MBS market shows it’s significant,” said Matthew Graham, chief operating officer at Mortgage News Daily, which closely tracks interest rates and has already seen rates fall on news of the announcement alone.
How soon this will start and how long it will take is still unclear, but analysts are predicting where mortgage rates will end up. Most companies see declines between 25 and 50 basis points, some even less.
“We believe that the $200 billion in MBS purchases could lower mortgage rates by approximately 10 to 25 bps, reducing the current 30-year mortgage headline rate to approximately 6.0% (currently 6.21%). “Although still high compared to average loan balances of 4.4% and the recent level of 3.25% as of January 2022, this decline could boost both new construction demand and existing home sales,” analysts said. UBS wrote.
Simply put, even if interest rates were to drop to 5.9%, a person buying a median-priced home of about $425,000 with a 20% down payment and a 30-year fixed mortgage would see their monthly payments drop by $118, according to the National Association of Realtors. To some, that may not seem like a big deal, but for first-time buyers looking to buy at an affordable price, it can make a difference. However, you will need to save for a down payment, which is currently the biggest hurdle for most beginners.
Housing construction stocks rose in response to this news, but even before that, mortgage interest rates had already been bought significantly, reaching the 5% range. Their recent concerns center on rising costs from tariffs and continued labor shortages. That said, this news alone could impact builder buyer demand.
“I think it’s psychologically effective,” said Ivy Zelman, executive vice president of research and securities at Zelman, part of Walker & Dunlop. “I think there may be people entering the market today who didn’t even know that construction companies were offering to buy mortgage rates.”
But Zelman also points out that overall affordability, not just mortgage rates, is what is holding buyers back in the broader housing market. Consumers are tight and, ironically, home prices are nearly 50% higher than before the pandemic, thanks to record mortgage rates driven by MBS purchases.
“This is not enough to really move the market, because we know that people can’t qualify at 4.99%. We can say mortgage rates are going to go down below 5%, but there are still some people who won’t be able to qualify at 4.99%. So I think we need to do more,” Zelman said.
This could also help builders’ profits, which have been shrinking recently due to rising costs.
“From a demand perspective, it may be a small gain due to positive psychological effects on consumers,” said UBS analyst John Roballo. “What’s bigger than that is the potential ability for builders to start removing some incentives, which would significantly increase gross margins.”
However, this decline could allow current homeowners to save on their monthly payments through refinancing. Interest rates have already been steadily declining, with the 30-year fixed rate down from a recent peak of 7.16% a year ago. Prior to the announcement, mortgage refinance applications were already up 133% year-over-year, according to the Mortgage Bankers Association.
A general rule of thumb is that refinancing is only worth the cost if you can save more than 75 basis points on your mortgage interest rate. This could lead to more refinance candidates, especially those who took out a loan in the past two years. However, interest rates for the majority of homeowners are still below 4%.
