Fannie and Freddie Are Stockpiling Billions in Mortgages, Which May Push Rates Lower

Fannie Mae and Freddie Mac have vastly increased their holdings of mortgage-backed securities in recent months, which may have ripple effects that could help push mortgage rates lower.

Since May, Fannie and Freddie have added more than $55 billion in mortgage principal balances to their combined holdings, an increase of more than 30%.

That's taken their combined mortgage holdings to a whopping $234 billion, the highest in four years, and analysts tell Bloomberg, which first reported the move, that Fannie and Freddie's holdings could expand an additional $100 billion next year.

Fannie and Freddie, and the federal regulators that run them, have offered no explanation for the dramatic balance sheet expansion, leaving analysts and industry observers guessing about the motive.

The two companies, which have been under federal control since 2008, may be boosting their mortgage holdings in preparation for a public stock offering, a move that President Donald Trump has teased for months.

On the other hand, or additionally, the move could be aimed at engineering lower mortgage rates, another long-standing goal of the Trump administration.

"Fannie and Freddie adding to their balance sheets basically represents a boost in demand for mortgage-backed securities," says Realtor.com® senior economist Joel Berner. "This would shift up the price and down the yield on the going market value for home loans, and that depressed yield would equate to lower mortgage rates."

In other words, by gobbling up mortgages on their own balance sheets, Fannie and Freddie make mortgages more valuable on the open market, incentivizing lenders to make more loans and lower their interest rates.

That could be one reason that the so-called yield spread, or the difference between mortgage rates and the 10-year Treasury yield, has been shrinking in recent months.

Mortgage rates are always a bit higher than the 10-year Treasury yield, because investors demand a higher return for riskier assets, and homeowners are more likely to default than the U.S. Treasury is.

But the amount of the yield spread varies based on a variety of factors. Since May, roughly when Fannie and Freddie began their buying sprees, the spread has contracted by about 0.25 percentage points.

During the same time period, mortgage rates have fallen by about 0.57 percentage points, to around 6.2%, suggesting that compression of the yield spread accounts for nearly half of the recent reduction in mortgage rates.

"Fannie and Freddie are doing all they can to make mortgages attractive to both debt market investors and prospective homebuyers in an attempt to grease the gears of a sluggish housing market in 2025," says Berner.

Prelude to an IPO?

Fannie and Freddie purchase home loans to package into investment vehicles known as mortgage-backed securities (MBS), which they then typically sell on to investors. This helps ensure ready investment demand for mortgages, bringing liquidity and stability to the market.

The two companies inevitably hold some MBS on their balance sheets, whether as part of the pipeline prior to sales, or as a supplement to cash flow by collecting interest payments directly, instead of through guaranty fees paid by lenders.

Prior to 2008, Fannie and Freddie ballooned their combined holdings to more than $1.5 trillion as a way to juice earnings, by borrowing heavily at low interest rates and plowing the money into high-yield debt and increasingly risky assets.

That strategy backfired in the subprime mortgage crisis, which blew up their balance sheets with large valuation and credit losses, necessitating the federal bailout that landed Fannie and Freddie in conservatorship.

Under the strict rules of conservatorship, Fannie and Freddie were forced to shrink their retained portfolios and rebuild capital.

By the 2020s, both enterprises had much smaller retained portfolios relative to precrisis levels, but much larger outstanding guarantee books, reflecting a shift from leveraged investment companies toward capital‑constrained credit guarantors.

Now, however, growing their retained portfolios may help Fannie and Freddie juice their earnings before a public share offering, making them more attractive to potential investors.

"The move comes during a period when Fannie and Freddie are being considered for an IPO," says Berner. "Expanding their income streams to include more direct interest payments could help them show off how profitable they could be under public ownership and attract investors."

Since starting his second term, Trump has repeatedly dangled the possibility of a public share offering for Fannie and Freddie, although the timeline and details of the plan remain unclear.

Meanwhile, Trump has also focused on lower mortgage rates as the centerpiece of his affordable housing agenda, meaning that easing rates may be a happy side effect of the balance sheet expansion.

"By expanding their balance sheets, Fannie and Freddie may bolster the housing market and lower mortgage rates in an environment where housing sales are sluggish and price growth is weak—two politically unpopular realities," says Berner.

Spokespersons for Freddie Mac and the Federal Housing Finance Administration, which oversees Fannie and Freddie, did not respond to requests for comment about their retained portfolios. A spokesman for Fannie Mae declined to comment.