What President Trump can do about mortgage rates

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Since the US-Israeli war with Iran erupted, yields on the ten-year Treasury note have risen almost half a point, pulling residential mortgage coupons up a similar amount for 30-year fixed rate loans. Markets generally assume that nothing can be done to force mortgage rates down without the Fed restarting massive purchases of Treasury debt (aka "quantitative easing" or QE.) But this is wrong. 

President Donald Trump has focused on lowering mortgage rates through direct intervention, specifically directing Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities to drive down borrowing costs. He also has criticized the Federal Reserve's approach to rates.

While the Fed does have the capacity to forcibly lower interest rates by purchasing securities via open market operations, the actionsbene of the Board of Governors (not the FOMC, of note) are ultimately counter-productive. 

In 2020-2022, when the Fed purchased Treasury securities and also bought mortgage-backed securities, they did force interest rates down, but in doing so also created an illiquid ghetto of trillions of dollars worth of low-coupon securities. These low coupon, low-priced MBS and Treasury debt actually forces interest rates higher.

Consider the fact that in 2026, the weighted average coupon (WAC) on $3.2 trillion in outstanding Ginnie Mae MBS only increased from 4.07% in December 2025 to 4.08% in January 2026, according to the must read GNMA Capital Markets Report.  

These low coupon loans and MBS trade at very low prices in the secondary markets for loans and securities, in part because the coupon rates are below the cost of funds for banks and dealers. The low coupons means that these securities have very low prices and very long durations – in simplistic terms, the time it takes for a return of your original capital. 

While some policy makers and analysts want the Fed to resume QE purchases of securities to push down residential mortgage rates, the central bank is actually the wrong tool for government when it comes to yield curve management. Instead, the GSEs – Fannie Mae, Freddie Mac and the Federal Home Loan Banks – are far better tools for managing down the cost of mortgages and also Treasury debt. 

When President Trump ordered FHFA Director Bill Pulte to authorize open market purchases of MBS by the GSEs, this was partly the right idea but not big enough. A mere $200 billion does not move the needle. The President and Bill Pulte need to think bigger, but without creating risk for the Treasury or the enterprises themselves.

Right now, the GSEs are buying current coupon MBS and retaining these securities in portfolio, thus creasing market risk and hedging expense for Fannie Mae and Freddie Mac as their portfolios grow. Fannie Mae and Freddie Mac each have about $150 billion in retained portfolios. 

"Both GSEs have remained active in the MBS markets, which has helped to keep spreads 25bps or so below where we may otherwise be without their participation," notes Scott Buchta of Brean Capital. 

"They have also retained more of the negative convexity on balance sheet as well, as evidenced by their growing duration gaps (although still very manageable). We expect the GSEs to remain active in the markets given the current level of spreads and interest rates."

Yet it is actually difficult for the GSEs to grow their portfolios at present because lending volumes are low and likely to fall sharply in Q2 due to higher mortgage rates.  Also, the GSEs need to buy new mortgage loans and issue securities in order to make money. 

The answer is to change the model of GSE purchases from buy and hold current coupons in portfolio to buy to sell all low coupons, and do so in far greater size. Specifically, the GSEs should take a page from the US Treasury's coupon repurchase program and aggressively start to tender for the trillions of dollars in low coupon agency and government MBS. 

Since the U.S. Treasury buyback program resumed in May 2024 to target older, low-coupon debt (averaging roughly 2.39% coupon), the Treasury has repurchased approximately $104.5 billion in par amount for liquidity support and over $107 billion for cash management, totaling over $300 billion by the end of 2025. 

These operations, which buy back debt at a steep discount, have resulted in significant gains to Treasury, although the new issuance has higher coupons. But the benefit to the Treasury market in terms of enhanced liquidity and lowering the long-term structure of interest rates is considerable. But the numbers are too small. 

The key here is to understand that the GSEs are not really meant to be long-term investors in assets. They are hyper-efficient conduits for issuing securities. By using Fannie Mae and Freddie Mac's power as issuers to eliminate low coupon MBS and also COVID-era Treasury securities, the bond market will benefit and the risk to the taxpayer and the enterprises will be reduced. 

READ MORE: What Fannie Mae, Freddie Mac MBS purchases mean for reform

The GSEs ought to begin to tender for the lowest coupon agency and government MBS, and also Treasury notes and bonds, both from the public and also from the Federal Reserve Banks. This "AAA" paper will then be restructured into collateralized mortgage obligations (CMOs) and sold into the huge market of bond investors who seek risk-free assets. 

Since there is today a relative scarcity of risk-free assets for purchase by banks, REITs, insurers and pension funds, the GSEs can price the front tranches of the CMOs at tight spreads and thereby generate profits. The excess income from these sales can be remitted back to the Treasury to reduce the moneys owed to the taxpayer by the GSEs. 

By burying these low-coupon securities inside CMOs, the long duration of these securities will be removed from the MBS market permanently. CMOs with "AAA" collateral don't trade, they just go into institutional portfolios and disappear. The GSEs could transfer the volatile tail pieces of these CMO transactions to the Treasury or the FHLBs, which have the capacity to hold them long-term. 

By changing the model for GSE MBS purchases from buy and hold to buy to restructure and sell, the Trump Administration and Director Pulte can unleash the true power of the GSEs as issuers of securities rather than tiny static portfolios. The objective over the next three years should be to repurchase and restructure every agency and government MBS below a 4% coupon and also buyback low coupon Treasury debt in the process.

When we take duration out of the bond markets, we reduce interest rate sensitivity, making bond prices less volatile, rather than controlling the market's short-term direction. Bonds with lower duration (shorter maturity/higher coupon) are less sensitive to interest rate changes. If rates rise, short-duration bonds lose less value than long-duration bonds, reducing interest rates over the long-term.

Selling low coupon MBS and also Treasury paper purchased by the GSEs to structure CMOs will generate billions in additional income, repair the damage done to the bond market by the Fed via QE, reduce the moneys owed to the taxpayer and provide a huge tangible benefit to the mortgage market by lowering the long-term term structure of interest rates.