Here's one way the Fed could lower mortgage rates almost overnight - and it's not the rate cut Trump wants

By Joy Wiltermuth

The Trump administration is considering declaring a national housing emergency as soon as this fall

The Trump administration is mulling declaring a national emergency in the housing market. What investors in the sector think about it.

There could be a magic button to lower U.S. mortgage rates almost overnight, but it isn't the one President Trump has been talking about.

The Trump administration earlier this week said it was considering declaring a national housing emergency as soon as this fall, noting high borrowing costs as a stumbling block.

"We need a little help from the Fed," Trump said Tuesday in an Oval Office briefing, while criticizing Federal Reserve Chair Jerome Powell for being "too late" to cut short-term interest rates.

"It makes it very hard for people to get mortgages," Trump said.

The Fed controls short-term rates, but markets and expectations around the economy dictate longer-term rates that underpin things like mortgage loans. That essentially means the U.S. government would need to convince investors to buy its bonds - and get paid less. Two such kinds of government-backed debt are Treasurys and agency mortgage-backed securities.

"The interesting conversation would be around what the Fed might do with its mortgage holdings," said Mike Cudzil, a portfolio manager at bond giant Pimco. "Right now, the market assumes it will be a Treasury-only balance sheet, with it continuing to run off mortgages and purchase Treasurys."

Should the central bank start reinvesting proceeds from its maturing mortgage bonds back into the mortgage-debt market, Cudzil estimates it could lower the rate on 30-year fixed mortgages by about 20 to 40 basis points "almost immediately."

That could spur a refinancing wave for borrowers with recent, higher-rate mortgages - but the path to affording a home for first-time buyers still looks rough.

How mortgage rates work

Mortgage rates are so intertwined with the U.S. bond market that pricing gets complicated pretty quickly.

Here's a simple way to look at how the math works: U.S. mortgages are mostly priced off the 10-year Treasury yield plus a spread, or the extra compensation a bond investor earns for taking risks. The recent 10-year yield BX:TMUBMUSD10Y of 4.2% and a 2.25% spread gets a borrower roughly to the 6.5% 30-year fixed mortgage rate seen in early September.

"Reducing that spread helps a lot," said Lawrence Gillum, chief fixed-income strategist at LPL Financial - noting that it had been above 3%, but historically has run closer to 1.75%.

Any shift by the Fed back to buying government-backed mortgages could entice other investors to follow its lead, creating more demand and likely lowering 30-year mortgage rates as a result.

"Clearly, if they start rebuilding the mortgage portfolio, that would narrow the spread," said Steven Blitz, chief U.S. economist at GlobalData TS Lombard.

Yet Blitz thinks lower rates won't solve other issues on the demand side of the housing equation - particularly with home prices still high, the overhang of student-loan debt and general pessimism among younger adults around future wage growth. All that paints a pretty dreary picture for first-time buyers looking for a foothold in the property market. "There's no thought or confidence that income is going to grow faster than that mortgage payment," Blitz said.

Another risk of turning today's renters into homeowners is that when the next recession hits, likely spurring layoffs, another foreclosure crisis could unfold for those borrowers who didn't benefit from rising home equity during the pandemic.

"Anything that's going to facilitate the building of homes is terrific," Blitz said, referring to talk at the White House about declaring a housing emergency. But when the next recession comes, he noted, "you are going to turn all of those buyers into renters again."

Is there a housing emergency?

Home prices retreated this summer, especially in many Sunbelt states that boomed during the pandemic, but they still were a touch higher on a yearly basis as of the second quarter, according to the Federal Housing Administration.

Given the lack of affordability, including average mortgage payments of nearly $3,000 a month, any aggressive retreat in home prices could set off alarm bells, said Tracy Chen, a portfolio manager on the global fixed-income team at Brandywine Global.

Chen favors rezoning and other efforts to increase new-home supply, but she also thinks another round of mortgage-bond buying by the Fed - while likely unpopular - may be potentially necessary down the road. "The housing market is a little precarious right now," she said.

The Fed quickly injected liquidity into financial markets by slashing rates and greatly expanding its balance sheet after the 2008-2009 financial crisis, and again during the pandemic in 2020. It did so by buying up trillions of dollars in low-coupon Treasurys and agency mortgage-backed securities.

That quickly delivered existing homeowners and new buyers a financial lifeline by allowing them to lock in historically low rates of 4% and lower. Home prices surged.

Since 2022, however, the Fed has been carefully shrinking it balance sheet, getting it recently down to about $6.6 trillion from a nearly $9 trillion peak, by letting a set amount of its bonds mature each month without reinvesting those funds back into the market.

Fed Chair Jerome Powell said several times in recent years that the U.S. central bank wants to get primarily to a Treasury-only balance sheet.

Should the Fed stick to that plan, there's other potential ways to stoke demand for government-backed mortgage bonds. Citrini Research recently suggested that the White House's privatization plans might include letting housing giants Freddie Mac (FMCC) and Fannie Mae (FNMA) resume gobbling up more mortgage debt they help create.

Brandywine's Chen noted that Freddie and Fannie owned roughly $1.6 trillion of combined mortgage debt in the run-up to 2008, when they were placed into government conservatorship. While they still have a shortage of capital, they have been buying close to $10 billion a month, she said.

See: How the Trump administration could lower mortgage rates and bypass the Treasury market entirely

Yet there's also been pushback around how much the government and the Fed should be involved in markets.

The nearly $10 trillion agency mortgage-bond market already has been seeing decent demand from investors this year, according to Timothy Crawmer, a director and global credit strategist at Payden & Rygel.

Total returns were around 4.5% this year for owners of lower-coupon mortgages, with about half of the market currently based off mortgages at rates of 4% and lower. For recent batches of mortgages written with 6%-plus rates, total returns have been 5% and higher, Crawmer said.

"Incremental demand from the government would definitely tighten things for sure," Crawmer said - but any effort to make housing more affordable for first-time buyers may also require mortgage-payment assistance or the government finding a way to depreciate the housing market.

"I don't know what they are going to do to alleviate the situation," he added.

-Joy Wiltermuth

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09-04-25 1256ET