President Donald Trump announced on social media Thursday that he is instructing the federal government to buy $200 billion in mortgage bonds, a move he claims would help reduce mortgage rates at a time when many Americans are increasingly concerned about soaring home prices.
Trump stated that the two mortgage companies under government conservatorship, Fannie Mae and Freddie Mac, have $200 billion (£149 billion) in cash to facilitate the purchase. 'This will drive Mortgage Rates DOWN, monthly payments DOWN, and make the cost of owning a home more affordable,' he posted, according to the Associated Press.
Will It Actually Lower Your Monthly Payments?
For homeowners hoping for relief, the real-world impact may be limited. Daryl Fairweather, chief economist at real estate brokerage Redfin, estimated that the government's purchase of mortgage debt could reduce rates by just 0.25 to 0.5 percentage points for a 30-year fixed-rate mortgage.
Currently, mortgage rates are averaging around 6.2%, according to Freddie Mac. Even a half-point reduction would still leave borrowing costs well above the sub-3% rates many homeowners secured during the pandemic.
'At a high level, I feel this is putting a Band-Aid on a deeper issue and it probably wouldn't lower rates enough to really undo the mortgage rate lock-in effect,' Fairweather told the Associated Press.
Since September 2022, 30-year mortgage rates have not fallen below 6%, according to Freddie Mac data.
The Lock-In Effect Keeping Homes Off the Market
The Federal Reserve previously purchased mortgage bonds during periods of economic turmoil to help lower interest rates, prompting many homeowners to refinance at rates of 3% or less. However, these low rates have unintentionally created a 'lock-in effect': homeowners are reluctant to sell because doing so would mean taking out a new mortgage at significantly higher rates.
This phenomenon has restricted the housing supply, contributing to the ongoing shortage of homes and making homeownership increasingly unaffordable for many Americans.
'Lowering mortgage rates by maybe a quarter or half a point may encourage some additional demand on the margins, but I don't think it's going to resolve the restrictions that exist in the housing market,' Fairweather cautioned.
A Gamble with Emergency Reserves
Beyond the modest potential for rate relief, the proposal involves considerable risk. Trump would be utilising cash reserves that are intended to serve as a buffer against an economic downturn, similar to the crisis experienced during the Great Recession.
Freddie Mac and Fannie Mae could become more vulnerable if adverse developments occur in the housing market, according to the analysis by the Associated Press. Both mortgage giants entered government conservatorship in 2008 amid the financial turmoil of the recession.
White House officials did not immediately respond to questions about the timeline for the proposed purchases.
The Bigger Picture: A Supply Crisis Money Cannot Fix
Home prices have generally outpaced income growth, largely due to a long-standing construction shortfall. This has made it increasingly difficult for renters to buy their first home and for current owners to upgrade.
This challenge has persisted since Trump's first term, rooted in the recovery from the housing market collapse that triggered the 2008 financial crisis.
The Federal Reserve currently holds approximately $2 trillion (£1.48 trillion) in mortgage-backed securities, down from $2.7 trillion (£2.01 trillion) in June 2022. The central bank has been unwinding its mortgage-debt holdings as the US economy recovers from the pandemic.
As of mid-2022, outstanding mortgage debt totalled around $21.1 trillion (£15.7 trillion), according to the St. Louis Federal Reserve.
In the run-up to the midterm elections in November, Trump and the White House have signalled they are responding to voter concerns about affordability. Last month, the president indicated plans to introduce housing reforms, and on Wednesday, he announced intentions to restrict institutional investors from purchasing residential properties.
Although the average mortgage rate has dropped from nearly 7% at the start of Trump's second term last year, the decline has done little to ease the financial pressure on households burdened by rising costs of housing, food, and energy.
