What Trump’s $200B MBS proposal means for mortgage spreads, rates

Fannie Mae and Freddie Mac quietly increased their purchases of mortgage-backed securities (MBS) in 2025, helping push mortgage spreads lower toward the year’s end. Most analysts, however, were not expecting further meaningful tightening in the near term — at least until this week.

That changed Thursday after President Donald Trump posted on social media that he’s directing representatives at the government-sponsored enterprises (GSEs) to acquire $200 billion in mortgage bonds.

The comments triggered a flight into MBS and further narrowed mortgage spreads — the gap between the 10-year Treasury yield and 30-year mortgage rates, which tend to move in tandem due to their long-term duration.

“$200 billion is small, but not insignificant,” Nash Paradise, director of sales at UMortgage, explained in an interview with HousingWire. “The total MBS market is about $9 trillion, so $200 billion was enough to get some instant overreaction in MBS purchasing late yesterday and has the potential to impact the spreads in a range of 0.15% to 0.3%.”

Wells Fargo analysts similarly estimated that if the GSEs are able to execute at least $100 billion in purchases, the move could tighten the MBS basis by 20 basis points (bps), all else being equal. “A tighter basis would indirectly lower primary mortgage rates, potentially thawing turnover activity in lower coupons and driving supply expectations higher,” they wrote.

By Friday morning, Paradise said the yield on the 5.0 MBS coupon had improved by about 50 bps. That move could translate into mortgage rate improvements of roughly 7 to 10 bps compared with earlier in the week.

Meanwhile, Keefe, Bruyette & Woods analysts added that, while spreads between agency MBS and Treasurys have tightened and stand at around 89 bps, in line with the long-term industry average, “we don’t think there is meaningful room for spread tightening.”

“However, spreads were roughly 25 bps tighter during the pre-Covid period so we could potentially see some tightening,” they wrote in a report.

Who’s backing the MBS market?

Historically, Fannie and Freddie have used their retained portfolios to support housing affordability, acting as marginal buyers of MBS and subsidizing guarantee fees.

Prior to being placed into conservatorship in 2008, the GSEs expanded their portfolios aggressively — including exposure to risky mortgages — before the Federal Reserve stepped in as the dominant buyer through quantitative easing following the financial crisis.

The Fed, however, is moving in the opposite direction. In October, Fed officials announced that principal payments from MBS would be reinvested into Treasurys, further reducing the central bank’s footprint in the mortgage market.

“President Trump’s mandate seems to indicate that the GSEs could become more like the Fed in terms of lack of price sensitivity, which would imply tighter spreads and lower mortgage rates,” Morgan Stanley analysts said in a report. 

The Morgan Stanley analysts wrote that a $200 billion purchase program would be roughly equivalent to the Fed’s annual MBS runoff, suggesting a potential tightening of about 15 bps. And if interest rate duration is hedged, mortgage rates could end 2026 around 5.6%, in line with their rate strategist forecasts. That scenario could lift existing home sales from an initially expected 4.23 million to somewhere in the range of 4.25 million to 4.30 million.

But Realtor.com senior economist Joel Berner added in a statement that the Fed continues to hold $2 trillion in MBS even after three years of reducing their holdings, and “without that same level of scale and credibility, any impact on mortgage rates would likely be modest and short-lived.” 

Banks have also retreated from the MBS market since the financial crisis, constrained by stricter regulatory capital requirements. As a result, a growing share of MBS is now held by money managers, raising questions about whether they will add to positions or take profits as Fannie and Freddie potentially crowd the trade, according to Wells Fargo analysts.

GSEs’ financials

Fannie and Freddie added $37 billion in MBS to their retained portfolios between January and November, including $15 billion in November alone. Since Bill Pulte assumed the role of director at the Federal Housing Finance Agency (FHFA), the GSEs have added $54 billion.

Morgan Stanley analysts expect net MBS issuance to total $175 billion in 2026, largely driven by Ginnie Mae loans. That dynamic could create a mismatch unless the GSEs expand their ability to manage portfolios of Ginnie Mae securities, which are often tied to loans serving veterans and lower-income borrowers.

Each GSE’s retained portfolio is currently capped at $225 billion, and Morgan Stanley estimates there is roughly $179 billion of remaining capacity. The $200 billion in cash cited by Trump includes restricted cash and securities purchased under agreements to resell.

That means the GSEs could fund additional MBS purchases by selling loans, reallocating assets or amending the Preferred Stock Purchase Agreements (PSPAs) to raise portfolio limits, the analysts said.

“A further question is what this does to their capital requirements and ability to privatize, as we would expect that they would need to hold much more capital against a larger retained portfolio, likely pushing out the timeline of recapitalization plans,” the Morgan Stanley analysts added.