Will mortgage rates fall if the GSEs buy $200 billion of MBS?

If Fannie Mae and Freddie Mac If Fannie Mae and Freddie Mac materially increase their purchases of mortgage-backed securities (MBS), the most likely impact is modest downward pressure on mortgage rates. The effect is limited, uneven, and conditional on broader market forces.

Transmission Mechanism:

When GSEs buy more agency MBS, demand for those securities increases. This pushes MBS prices higher and yields lower, which compresses the primary–secondary spread for mortgage lenders. Lenders can then offer slightly lower mortgage rates to borrowers. This mechanism is similar to quantitative easing, though on a much smaller scale.

Expected Magnitude:

Historical experience suggests mortgage rates could fall by approximately 5 to 25 basis points (0.05%–0.25%), with most estimates clustering around 10–15 basis points for a program on the order of $200 billion. This is noticeable but not dramatic.

Why the Impact Is Limited:

The agency MBS market is very large, roughly $9–10 trillion, so even a $200 billion purchase program represents only a small share of outstanding securities. Treasury yields still play a dominant role in mortgage rate determination, meaning rising Treasury yields can offset the benefits of GSE buying. Additionally, banks and the Federal Reserve are not expanding balance sheets, limiting the overall effect.

Secondary Effects:

Potential positives include narrower MBS spreads, improved rate stability, and better lender confidence. Risks include perceptions of political interference, which could raise term premiums elsewhere, and concerns about prepayment risk among investors.

Net Assessment:

The base case is small but real rate relief. In the best case, mortgage rates could improve by 15–25 basis points if macro conditions are favorable. In the worst case, GSE buying merely prevents rates from rising further.

Bottom Line:

Increased GSE MBS purchases are best viewed as a cushioning tool rather than a transformative policy. They can modestly lower mortgage rates, especially when Treasury yields are stable or declining, but they are not a game-changer for the mortgage market.

If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or andrew.oliver@compass.com.

Andrew Oliver, M.B.E.,M.B.A.

REALTOR®

m 617.834.8205

www.OliverReportsMA.com

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