Mortgage rates fell sharply 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 interest rates and monthly payments and make the cost of owning a home more affordable,” he said in the Truth Social post.
According to Mortgage News Daily, the interest rate on a 30-year mortgage fell 22 basis points to 5.99%, reaching the low reached on February 2, 2023.
Fannie Mae and Freddie, which are under government supervision, do not make home loans. They buy loans from lenders, bundle 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.
By purchasing more mortgage-backed bonds or securities, mortgage interest rates decrease. During the first two months of the Covid pandemic, as markets fluctuated, the Federal Reserve Agency purchased $580 billion worth of MBS. Subsequent purchases were made throughout the year. According to the Dallas Fed, from March 2020 to June 2021, the Federal Reserve increased its agency MBS holdings from $1.4 trillion to $2.3 trillion.
The Federal Reserve also cut its own lending rate to zero. This combination brought the average interest rate on the 30-year fixed mortgage to a record low, sitting at just 2.75% at the start of 2021, according to Mortgage News Daily.
“How big is a $200 billion deal? That depends on a few factors, but the reaction in the MBS market is enough to tell you it matters,” said Matthew Graham, chief operating officer at Mortgage News Daily, which closely tracks rates and already sees them falling on news of the announcement alone.
While it is not yet known how quickly this will begin and how long it will last, analysts are predicting where mortgage rates could end up. Most estimate the decline to be somewhere between 25 and 50 basis points, with some even lower.
“We estimate that $200 billion in MBS purchases could result in a reduction in mortgage rates of approximately 10 to 25 basis points, potentially reducing the overall 30-year mortgage rate to approximately 6.0% (currently 6.21%), although this decrease compares to the average outstanding mortgage rate of 4.4% and the level of 3.25% in January “Still elevated in 2022, this decline could boost both demand for new homes and sales of existing homes,” analysts at UBS wrote.
Put simply, if interest rates dropped to even 5.9%, the monthly payment would drop by $118 for someone who bought the home at the median price — which is around $425,000, according to the National Association of Realtors — and used a 30-year fixed-rate mortgage with a 20% down payment. That might not be much for some, but for first-time buyers who are on the edge of affordability it could make a difference. However, they would still have to save for the down payment, which is currently the biggest hurdle for most first-year students.
Homebuilder stocks rallied on the news, but they were already buying mortgage rates well into the 5% range beforehand. Their concerns recently have focused more on rising costs from tariffs and a persistent labor shortage. However, this news alone could have an impact on buyer demand for the developers.
“I think psychologically it will help,” said Ivy Zelman, executive vice president of research and securities at Zelman, a Walker & Dunlop company. “I think there could be people coming into the market today who have been looking and didn’t even know that developers were offering buybacks on mortgage rates.”
But Zelman also points out that in the broader real estate market, it’s not just mortgage rates but overall affordability that’s deterring buyers. Consumers are overextended and home prices are nearly 50% higher than before the pandemic, ironically due to record low mortgage rates caused by MBS purchases.
“That’s not enough to really get the market going because we know people can’t even qualify for 4.99%. You can say mortgage rates are going to go down below 5, but we have people who still can’t qualify for 4.99%, so I think there’s still a lot of work to do,” Zelman said.
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This could also improve developers’ margins, which have fallen recently due to higher costs.
“From a demand perspective [it is] “Perhaps a marginal benefit from the positive psychological impact on consumers,” said John Lovallo, an analyst at UBS. “Greater is the potential opportunity for builders to withdraw incentives to some extent, which would have a very positive impact on gross margins.”
However, the decline could also help current homeowners save on their monthly payments by refinancing. Interest rates have already been steadily declining, with 30-year fixed rates down from their recent peak of 7.16% a year ago. According to the Mortgage Bankers Association, applications to refinance a home loan were already 133% higher year-over-year before this announcement.
As a general rule of thumb, refinancing is only worth it if you can save more than 75 basis points on your mortgage rate. This would bring many more potential candidates into the refinancing pool, especially those who took out their loans in the last two years. However, the vast majority of homeowners still have interest rates below 4%.