Mortgage Rates Are Back in the 5s — Here’s Why

ShubhMortgage | ShubhAgent Market Update

This week’s market volatility was expected to revolve around the jobs report, but an unexpected headline quickly became the dominant driver.

On Thursday afternoon, President Trump announced that he would direct his representatives to purchase $200 billion in mortgage-backed securities (MBS). These securities directly influence mortgage rates, and buying at this scale would naturally place downward pressure on rates.

The announcement initially raised eyebrows and sparked skepticism. Regardless of personal views on presidential policy statements, the market’s response made one thing clear: this announcement is being taken seriously.

How do we know?

The simplest answer is the market reaction itself. The MBS market moved immediately and aggressively following the news. Traders do not reposition billions of dollars late in the trading day unless they believe the information is credible and consequential.

In short, price and volume don’t lie. The MBS market reacted far more than Treasuries, confirming that this move was specifically mortgage-driven rather than part of a broader bond rally.

For those who want to dig a bit deeper, the math also lines up. The $200 billion figure appears intentional. Based on the most recent regulatory filings, Fannie Mae and Freddie Mac currently have approximately $202.9 billion of remaining balance-sheet capacity under their existing caps. In other words, this was not an off-the-cuff number.

Further reinforcing the announcement, FHFA Director Bill Pulte, who oversees Fannie and Freddie, has publicly confirmed that this is indeed the plan.

Does the President have the authority to do this?

Yes. Under existing conservatorship and regulatory authority, the FHFA can direct the GSEs to purchase MBS up to the limits established in their PSPAs (the agreements governing conservatorship). In fact, the GSEs have already increased MBS holdings by roughly $50 billion over the past seven months, demonstrating that this mechanism is already in use.

Do the GSEs have the funds?

They do. Recent filings show nearly $200 billion in cash and cash equivalents, including short-term liquid securities. These purchases would not require funding from the Treasury or the Federal Reserve.

Additionally, the GSEs are the largest non-sovereign issuers of corporate debt in the world and can borrow at rates that allow new MBS purchases to remain cash-flow positive. The only meaningful constraint is the regulatory balance-sheet cap.

How impactful is $200 billion?

The market’s reaction alone tells us it matters. We can also look at what the prior $50 billion in purchases accomplished. During that period, mortgage spreads tightened significantly.

While many people focus on the 10-year Treasury as a benchmark, the 5-year Treasury has recently provided a more accurate comparison for mortgage spreads. Over the last several months, the spread between mortgage rates and 5-year Treasuries tightened by roughly 50 basis points. Even after accounting for other contributing factors, approximately 30 basis points of that improvement appears directly tied to increased MBS demand.

That said, returns diminish as spreads compress. We should not expect a simple four-times repeat of the prior impact. Still, the effect is meaningful. Mortgage rates dropped more than 0.20% in a single day, pushing the average top-tier 30-year fixed rate to its lowest level since February 2, 2023, matching the best levels seen in more than three years.

What happens next?

Much depends on the execution details of the purchases. While the MBS market has already reacted, continued volatility should be expected as traders attempt to price in uncertainty around timing, structure, and implementation.

Bottom line

This is not Federal Reserve–style quantitative easing, nor is it an open-ended commitment to ongoing MBS purchases. However, it is a meaningful development that places mortgage rates in a better position than before.

How much better remains to be seen — but volatility should be expected in the near term.