Fannie Mae and Freddie Mac have surged into the mortgage-backed securities (MBS) market with large buying orders, aiming to cool rising mortgage rates and ease market turbulence. Their move follows a directive from President Trump to boost MBS purchases by $200 billion — a bid to make home loans more affordable during a period marked by geopolitical tensions and rising borrowing costs.
Big Purchases in a Volatile Market
Mortgage rates have climbed to three-month highs, pushed upward by widening spreads in the bond market and heightened volatility tied to the US-Iran conflict. Fannie Mae and Freddie Mac, through their retained portfolios, started placing large bids for mortgage-backed securities as a countermeasure against these pressures.
The retained portfolios consist of bonds and loans the two government-sponsored enterprises hold instead of selling to investors. These portfolios have swelled to $278 billion as of January, up from just $158 billion in late 2022. Before the 2008 financial crisis and subsequent federal conservatorship, the combined portfolios had a value of around $1.5 trillion.
When President Trump ordered a $200 billion increase in MBS purchases a couple of months ago, it triggered immediate ripples in the roughly $9 trillion MBS market. Yields on newly issued securities, relative to Treasury bonds, narrowed by about 0.2 percentage points, indicating some easing of borrowing costs.
Why the Shift Matters
Fannie Mae and Freddie Mac play a huge role in the US mortgage market by buying, packaging, and guaranteeing home loans.
Their recent buying spree reflects an effort to stabilize markets shaken by geopolitical risks and rising Treasury yields. Still, their increased purchases might only partly offset the upward pressure on mortgage rates caused by broader economic tensions.
Housing affordability has become a growing concern amid these rate hikes. The government’s push to expand MBS buying aims to keep mortgage lending accessible, especially as borrowing costs rise in response to international conflicts and economic uncertainty.
The Rise of Nonbank Mortgage Lenders
While Fannie and Freddie work to stabilize the MBS market, a parallel shift in mortgage lending is reshaping the industry. Nonbank mortgage companies, like Rocket Mortgage, now dominate federally backed mortgage lending and servicing.
Since the Great Recession, banks have pulled back due to tougher capital requirements and financial stress, leaving nonbanks to fill the void.
From 2014 to 2024, nonbanks increased their share of federally backed mortgage servicing from 27% to 66%. Unlike traditional banks, these firms don’t use deposits to fund loans. Instead, they rely heavily on short-term funding sources, which can make them more vulnerable to market shocks.
This shift makes people wonder about the stability of the mortgage market. Nonbanks’ reliance on short-term funding contrasts with banks' more stable deposit base. If market conditions worsen, nonbanks could face funding pressures, potentially affecting mortgage availability and affordability.
What’s Ahead for Mortgage Markets?
Fannie Mae and Freddie Mac’s aggressive MBS buying shows how federal entities are stepping in during turbulent times. But the mortgage market itself is undergoing a major transformation, with nonbanks stepping into roles once held by banks. That might make the market more sensitive to funding disruptions.
Meanwhile, geopolitical tensions and rising Treasury yields still loom large, pushing mortgage rates upward. The government’s interventions may help, but they’re not a cure-all. The market will likely continue to wrestle with these forces in the months ahead.
The surge in MBS purchases by Fannie Mae and Freddie Mac signals a direct response to volatile market conditions and rising mortgage rates. At the same time, the growing dominance of nonbank lenders adds a layer of complexity to the mortgage lending landscape. How these factors play out will matter greatly for homebuyers and the broader housing market going forward.
