A new proposal is floating around that could push mortgage rates even lower than they already are.
In case you haven’t noticed, the 30-year fix is ​​back in the low 6s and even knocking on the door of the 5s.
While that’s actually pretty good and below the long-term average of 7.75% historically, housing affordability is still pretty bad.
The quickest and easiest way to improve affordability is through lower mortgage rates, even if home prices are still too “high”.
A relatively easy solution is to have Fannie Mae and Freddie Mac buy mortgage-backed securities (MBS) to lower interest rate spreads.
Narrower spreads can lower mortgage interest rates even further
Over the past few years, mortgage spreads have been inflated relative to the 10-year government rate.
Historically, the 30-year fixed price is approx. 170 basis points (bps) above the current 10-year bond rate.
For example, if the 10-year rate was 4% today, the 30-year rate could be 5.70%.
Recently, however, this spread has widened due to things like prepayment risk and also a reduced MBS appetite from investors.
Over the past century, there has always been a big buyer of MBS, whether it was the Federal Reserve and its quantitative easing (QE) or Fannie and Freddie before the mortgage crisis of the early 2000s.
However, Fannie and Freddie (collectively the GSEs) found their portfolios constrained after the mortgage crisis when they entered government conservatorship. They basically couldn’t take on more risk.
As it stands now, the pair are allowed to own $450 billion in MBS, or $225 billion each.
But they hold only about $204 billion combined, meaning there is room to buy $246 billion more to reduce MBS supply and increase MBS prices.
Doing so would lower mortgage rates, since less supply of MBS means the price rises (and the associated mortgage rates may fall).
A new plea for the GSEs to get buy-in has been proposed by the Independent Community Bankers of America (ICBA) and the Community Home Lenders of America (CHLA).
In a letter to Treasury Secretary Scott Bessent and Federal Housing Finance Agency (FHFA) Director William Pulte, they recommended that each GSE “have the option to purchase up to $300B of MBS when the 30/10 spread is above 170 basis points.”
Currently, the spread is around 220 bps, which means it’s around 50 bps above “normal”.
GSE MBS purchases could push mortgage rates back into the 5s
The two trade groups claim that addressing this issue “could reduce mortgage rates by 30 basis points or more.”
So where would that put the 30-year-old stuck? Well, based on today’s rate of 6.17% from Mortgage News Daily, we could drop to say 5.875%.
That would certainly get some potential home buyers excited and also lead to a huge increase in interest rate and term refinancing activity for recent buyers.
As I pointed out a while back, five million refinances depend on mortgage rates coming back to 5.5%.
That would provide a lot of monthly payments to homeowners and boost the economy, as the couple pointed out in their letter that “housing accounts for nearly 20 percent of GDP.”
The potential downside, however, is that we’re just entering another quasi-QE situation where everyone expects someone to come in and bail out mortgage rates when they get “too high.”
They are probably already at reasonable levels, having fallen from 8% at the end of 2023 to just over 6% today.
And they appear to be on an even lower course with the possibility of the 5s even without a new, large MBS buyer.
The historical average for the 30-year fixed is 7.75%, and we’re already well below that. Should the GSEs take additional risks or just let the market work itself out?
It would be one thing if we needed to stabilize the mortgage market and provide emergency liquidity to keep things running.
But this looks more like just lowering mortgage rates because they aren’t as attractive as they necessarily could be.
By the way, mortgage interest rate spreads have also come on a ton since they widened as much as 325 bps in recent years, so progress has already been made there too!
