Fannie and Freddie: The New Mortgage Market Anchor

The Federal Housing Finance Agency (FHFA) has just issued a final rule that redefines the mission of Fannie Mae and Freddie Mac. The new 2026–2028 Enterprise Housing Goals are explicitly more ambitious, aiming to ensure these government-sponsored enterprises continue to support mortgages for families from every walk of life. This isn't merely a tweak; it's a strategic pivot. Director William J. Pulte framed the move as a corrective to what he called previous "harmful mandates," signaling a shift from a focus on risk management to one of active market intervention and policy delivery.

This directive is now being amplified by the White House. President Trump has issued a direct order for Fannie and Freddie to start buying bonds backed by mortgages, with a potential scale of up to $200 billion. The stated goal is to drive down mortgage rates and restore affordability-a key political objective. The move is a clear signal that the GSEs are being repositioned as the central, state-backed mechanism for stabilizing the mortgage market and achieving explicit policy outcomes, rather than operating as passive conduits of capital.

The mechanics of this new mandate are still emerging, and the initial directive lacked clarity on execution details. It was not immediately clear whether the purchases would be made directly by the GSEs, the Treasury, or another entity. Yet the market's immediate reaction was telling: the difference between mortgage bond yields and Treasury yields narrowed sharply after the announcement, an early sign the initiative could have tangible effects. The FHFA director confirmed the agency is "on it," aligning with the administration's push.

The bottom line is a fundamental reorientation. Fannie and Freddie are being instructed to use their massive balance sheets-reportedly flush with cash-to become active buyers in their own market. This transforms them from risk managers into policy tools. Their new mandate is twofold: to meet aggressive affordable housing targets and to serve as a direct counter-cyclical force, buying bonds to ease pressure on mortgage rates. In this new setup, they are the anchors the market now depends on.

The Structural Shift: From Risk Management to Market Support

The directive for Fannie Mae and Freddie Mac to become the primary buyer of mortgage-backed securities marks a fundamental reallocation of responsibility in the U.S. financial system. For years, the Federal Reserve served as the buyer of last resort, its massive holdings providing a crucial floor for mortgage bond prices. Now, that role is being transferred to the GSEs. As Treasury Secretary Scott Bessent noted, the administration's plan is explicitly designed to offset the pace at which these bonds are running off the Federal Reserve's balance sheet. This is a structural pivot: the Fed is withdrawing, and the GSEs are stepping in to fill the liquidity gap.

The financial mechanics enabling this shift are critical. Unlike a central bank, the GSEs are not a source of unlimited funding. Yet their current position provides a buffer. The initial directive came with an initial $3 billion round of purchases, and the scale of the potential program-up to $200 billion-must be executed against their balance sheets. The market's reaction hinges on whether these purchases are a one-time injection or a sustained, monthly commitment. As one analyst pointed out, the impact on mortgage rates will depend entirely on the timing of the purchase. A rapid, concentrated effort could push MBS prices higher and yields lower, directly easing borrowing costs. A drawn-out process, however, might have a muted effect.

This move represents a clear departure from the GSEs' traditional function. Historically, their role was centered on managing credit risk and ensuring the flow of capital to the mortgage market. Their new mandate, however, is to actively support liquidity and pricing. They are being asked to use their balance sheets not just to guarantee loans, but to become a direct counter-cyclical force, buying bonds to stabilize the market. This is a significant expansion of their role, transforming them from risk managers into active market participants.

Yet this shift exists in a state of tension. The GSEs are simultaneously under the shadow of a potential structural overhaul. President Trump has given very serious consideration to privatizing the enterprises, a move that would fundamentally reshape the mortgage market. This creates a policy uncertainty that could complicate the GSEs' ability to commit to a long-term, large-scale buying program. For now, they are being asked to act as anchors, but their long-term chart of the market remains uncharted.

Financial and Market Impact: A Multiplier Effect

The proposed $200 billion purchase represents a massive, one-time injection of liquidity into a market where it is sorely needed. The initial market reaction was telling: the spread between mortgage bond yields and Treasuries narrowed by 0.1 percentage points immediately after the announcement. That early move underscores the potential for a direct, multiplier effect. If executed with speed and scale, this intervention could push MBS prices higher and yields lower, directly easing the cost of borrowing for homebuyers. The impact would be most potent if the buying begins in the next two months, aligning with the seasonal spring demand pickup.

This liquidity support is critical for the housing market's projected trajectory. Analysts forecast total home sales to rise to 5.16 million units in 2026, while single-family mortgage originations are expected to reach $2.35 trillion. The GSEs' purchases are designed to help meet that demand by stabilizing the market and potentially lowering rates. In this setup, the GSEs become the new counter-cyclical force, directly offsetting the monthly runoff of mortgage-backed securities from the Federal Reserve's balance sheet. The goal is to prevent a sharp spike in yields as the Fed continues its gradual reduction of its $2 trillion MBS portfolio.

For the GSEs themselves, the financial calculus is complex. On one hand, the purchases could support their earnings. By buying bonds from their own portfolios, they may help stabilize prices and reduce the cost of capital for the broader market they serve. The initial $3 billion round of purchases has already begun, signaling operational readiness. Yet the long-term impact on their balance sheets remains a key uncertainty. The $200 billion scale is enormous relative to the GSEs' current capital buffers. While they are reportedly flush with cash, a sustained, large-scale buying program would strain their financial capacity and could lead to future losses if the market turns. The risk is that they are being asked to act as a permanent anchor, a role that may not be sustainable without a clear, long-term funding mechanism or a resolution to their potential structural overhaul.

The bottom line is a powerful but risky intervention. The $200 billion purchase, if executed, could provide a significant near-term boost to the housing market, supporting sales and originations forecasts. It directly addresses the liquidity vacuum left by the Fed's withdrawal. Yet the financial burden on the GSEs is substantial, and the political and structural uncertainty surrounding their future adds a layer of risk. This is a high-stakes maneuver where the potential payoff for market stability is matched by the cost to the entities tasked with delivering it.

Catalysts, Risks, and the Path Forward

The success of this new strategy hinges on a narrow window of execution. The primary catalyst is the timing of the purchase. For the $200 billion intervention to meaningfully impact mortgage rates ahead of the spring buying season, the bulk of the buying must begin in the next two months. The market's reaction will be a direct function of speed: a concentrated effort could push MBS prices higher and yields lower, directly easing borrowing costs. A drawn-out process, however, risks being absorbed by the market's normal flow, delivering only a headline-driven blip rather than a structural pivot. This timeline will also test the GSEs' operational capacity and their ability to navigate legal and capital constraints.

A major risk is that this intervention may force the GSEs into a more permanent, state-supported role, with the long-term viability of their current capital structure under question. The enterprises are already short of their capital requirements under the current regulatory framework. A sustained, large-scale buying program would strain their financial capacity and could lead to future losses if the market turns. This creates a policy tension: they are being asked to act as a permanent anchor, yet their potential privatization looms as a structural overhaul. If the GSEs become a permanent, state-backed buyer, it would fundamentally reshape the mortgage market, but it would also require a clear, long-term funding mechanism and a resolution to their uncertain future.

The broader risk is that this intervention may not be sufficient to counteract other headwinds. The Federal Reserve's ongoing balance sheet runoff of $15 billion in MBS per month is a persistent, monthly pressure. The administration's plan is explicitly designed to offset the pace of this runoff, but the GSEs' $200 billion purchase is a one-time injection. If the Fed's drawdown continues unabated, the market could still face a net outflow of liquidity, limiting the durability of any rate relief. This sets up a race between two forces: the state-backed buying program and the central bank's gradual reduction of its holdings.

The path forward is one of high-stakes uncertainty. The initial $3 billion round of purchases has begun, signaling operational readiness. Yet the market will be watching for the next major move: the announcement of a detailed, accelerated execution plan. For now, the GSEs are being asked to serve as the new anchors, but their ability to hold the line depends on a swift, decisive action and a resolution to the deeper structural questions about their future.