Fannie Mae and Freddie Mac added a combined $12.5 billion in agency mortgage-backed securities (MBS) to their retained portfolios in January, a volume that BTIG analyst Eric Hagen described as “lower than expected” but still effective in helping to drive down mortgage rates.
During a Jan. 21 speech at the World Economic Forum in Davos, President Donald Trump said he had directed the government-sponsored enterprises (GSEs) to purchase up to $200 billion in MBS. He had previously disclosed the directive in a Jan. 8 social media post.
In January, Fannie Mae purchased $8.5 billion in agency MBS, compared to $4 billion by Freddie Mac.
“Mortgage rates were 6.20% before the announcement, versus 5.95% currently, which we attribute roughly to: 15 bps of lower benchmark 10-year Treasury rates, 5-10 bps of tighter MBS spreads in the secondary market, and slightly lower/tighter profit margins for lenders,” Hagen wrote in a report.
Spreads between agency MBS and Treasury notes are now about 105 basis points, compared to 115 bps prior to the purchase announcement and roughly 140 bps at the end of last summer. Hagen does not expect spreads to tighten to the 75-bps levels seen at the end of 2021 but said further compression is possible if the yield curve steepens.
Comfortable headroom
Under their senior preferred stock purchase agreements, each GSE can hold up to $225 billion in mortgage-related assets. That compares to current portfolio balances of $143.5 billion for Fannie and $158.7 billion for Freddie.
The remaining headroom could prove supportive during a refinance wave, when mortgage rates tend to lag declines in benchmark rates as secondary market investors price in prepayment risk.
“Assuming the GSEs have ‘ample’ room to add assets to their portfolios, and the policy objective remains geared around supporting mortgage rates, we’d be surprised if the GSEs tolerated current coupon spreads breaching the 130-140 bps level,” Hagen added.
BTIG’s base-case scenario calls for roughly $5 billion to $8 billion in net new MBS purchases per month for each GSE over the next nine to 12 months.
Ending conservatorship
In equity markets, however, valuations for the GSEs have fallen about 40% since the MBS directive was announced, as investors grow less confident in the prospects for a near-term release from conservatorship.
Instead, Hagen said, markets increasingly believe Trump may seek greater control over mortgage rates, potentially weighing on earnings and dampening the appeal of the stocks in a relisting scenario.
That sentiment contrasts with the optimism that followed Trump’s return to office and his appointments of Scott Bessent as Treasury secretary and Bill Pulte as director of the Federal Housing Finance Agency (FHFA). Shares of the GSEs climbed to a 52-week high of $14 in September.
“The recent SCOTUS ruling to strike down tariffs frames the limits to the President’s unilateral powers, which admittedly trims some of our own optimism that a release from conservatorship can be accomplished seamlessly,” Hagen said.
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