Even As Gses Step Into Mbs Market, Macro Forces Are Controlling Mortgage Rates

Fannie Mae and Freddie Mac have been active in the mortgage-backed securities (MBS) market in recent weeks — but their approach appears more measured and opportunistic than many initially expected. Their activity has also been overshadowed by the U.S.-Iran conflict. 

“We’ve seen some activity from the GSEs. Instead of issuing cash window pools and putting those out for the bid, they are retaining all the premium pools,” said Jeana Curro, managing director and head of agency MBS research at Bank of America.  

Curro said the government-sponsored enterprises initially focused on conventional, production-coupon securities, which are most closely tied to primary mortgage rates. “That’s the best way to bring the primary mortgage rate down,” she said. “But over time, as they got quieter and more selective, then we started seeing premium pools, because those, from a relative value perspective, looked the most attractive.”

The market initially reacted strongly after President Donald Trump signaled support for increased activity, directing the GSEs toward a $200 billion expansion of their MBS portfolios. Bloomberg reported on March 22 that the GSEs have begun placing sizable orders to purchase these assets, according to a person with direct knowledge of the matter.

Two days after Trump’s announcement, the secondary market tightened by about 18 basis points, while primary mortgage rates dropped about 15 bps over time, Curro said. That momentum, however, proved short-lived. Spreads have since widened to 125 bps compared to preannouncement levels of 100 bps.

Powerful driver

The shift underscores a broader reality: GSE purchases are only one piece of the rate puzzle. While they can provide incremental support, movements in the 10-year Treasury yield remain a more powerful driver of mortgage rates. 

“Mortgage rates were sub 6% before the war and today they hit 6.62%, according to Mortgage News Daily. That is a big move,” HousingWire Lead Analyst Logan Mohtashami wrote Thursday. “It’s unfortunately the kind of move that the housing market has grown accustomed to over the past few years, but this year we had the best backdrop to keep rates lower for longer than we have seen since rates rose in 2022.”

Treasury volatility has intensified in recent weeks, fueled by concerns ranging from the tech sector to geopolitical tensions, including the conflict involving Iran.

“The GSEs have been in the market with some regularity, and the market has come to expect that they’ll add MBS and hit that $200 billion cap,” said Michael Bright, CEO of the Structured Finance Association. “That’s already priced into the market, into mortgage spreads. The rest is just executing market expectations at this point.” 

Unlike interventions by the Federal Reserve, the GSEs are not attempting to aggressively compress rates. “The Fed intentionally bought at inflated prices to drive rates down,” Bright said. “This is different — the GSEs acting more like asset managers.”

As a result, broader macroeconomic conditions — including inflation and geopolitical risk — are outweighing the impact of GSE activity, he said.

“Frankly, interest rates are higher, and mortgage spreads have widened because of all the macro, geopolitical, and inflation concerns that are going on,” Bright said. “Macro factors are much more significant than the $200 billion buy.”

Lender perspective

Recent swings in the secondary market have filtered through to lenders, although some say conditions appear to be stabilizing. At AD Mortgage, volatility forced frequent rate adjustments earlier this month.

Within the past two weeks, the company had to do two or three reprices each day, said Michelle Parkinson, the company’s senior vice president of capital markets. But in the past two days, they haven’t seen that volatility. “Stability has been important,” she said.

Parkinson said GSE activity appears more reactive than systematic. Rather than following a fixed strategy, the GSEs are adjusting to market conditions in real time, she said. 

“A lot of these purchases are going to be based on what the market’s doing, when they can take advantage of certain rates and prices,” Parkinson said. “Rates have been going up in the last week or two with all the volatility in the economy, so they’re stepping in, trying to bring some liquidity to the market and hopefully get those prices back up and rates back down.”

According to Parkinson, the GSEs are “taking just advantage of what market conditions are versus a hard-line approach that one could monitor and follow.”

Even as policymakers seek to support affordability, industry participants caution that prolonged intervention can have unintended consequences. “I would say there are side effects sometimes,” Parkison said. “If you keep rates too low for too long, it interrupts the natural cycle of the mortgage industry.” 

She pointed to the current “lock-in effect,” where homeowners with ultra-low mortgage rates are reluctant to sell and contribute to tight housing inventory.