Rising Federal Mortgage Guarantees and Their Impact on the U.S. Housing Market: Opportunities and Risks for MBS Investors

The U.S. housing market in 2025 is undergoing a transformation driven by significant policy shifts in federal mortgage guarantees. These changes, spanning both multifamily and single-family sectors, are reshaping residential real estate dynamics and creating complex opportunities for mortgage-backed securities (MBS) investors. As government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac expand their purchase caps and the Federal Housing Administration (FHA) adjusts its risk profile, the interplay between affordability, market stability, and investor returns is becoming increasingly critical.

Multifamily Market Dynamics: A Strategic Push for Affordable Housing

The Federal Housing Finance Agency (FHFA) has raised multifamily purchase caps for Fannie Mae and Freddie Mac to $73 billion each in 2025, with a further increase to $88 billion planned for 2026 according to reports. This represents a deliberate effort to channel capital into affordable housing, as at least half of each GSE's multifamily purchases must continue to support "mission-driven" affordable housing initiatives. While these caps are maximum allowable limits rather than targets, the policy signals a long-term commitment to addressing housing shortages in lower-income markets. For MBS investors, this could translate into a more stable demand for multifamily loans, particularly in urban areas where affordability gaps persist. However, the risk of over-leveraging in these sectors remains, as private capital may still dominate in higher-yield opportunities.

Single-Family Reforms: The Ackman Factor and Conforming Loan Limits

The most disruptive force in the single-family mortgage landscape is Bill Ackman's proposed merger of Fannie Mae and Freddie Mac, aimed at aligning with the Trump administration's goal of maximizing taxpayer value and stabilizing mortgage spreads. Ackman argues that a combined entity would reduce operational costs, lower mortgage rates, and create financial synergies, potentially accelerating the GSEs' path to an IPO by year-end 2025. If realized, this structural shift could redefine the risk-return profile of MBS, as a unified GSE might standardize underwriting practices and reduce idiosyncratic risks.

Simultaneously, conforming loan limits for single-family homes have been raised to $832,750 in most regions, with high-cost areas like Los Angeles and New York seeing limits jump to $1.25 million in 2026. These adjustments, driven by rising home prices, expand the pool of eligible borrowers for GSE-backed mortgages, potentially boosting residential construction and homebuyer demand. However, the increased exposure to high-cost markets also raises concerns about asset quality, particularly in regions with overvalued housing.

Risks in the Housing Market: Underwater Mortgages and FHA Stress

While federal guarantees are expanding access to credit, they are also amplifying risks in the housing market. A critical issue is the surge in underwater FHA mortgages, particularly those originated by large homebuilders like Lennar and D.R. Horton. According to John Comiskey's analysis, 27% of Lennar's and 18% of D.R. Horton's FHA loans are now underwater, meaning borrowers owe more than their homes are worth. These figures highlight the fragility of FHA-backed portfolios, where aggressive mortgage buydowns and inflated home prices have created a ticking time bomb for default risk.

The Voya Securitized Credit Fund Q3 2025 Commentary underscores this tension, noting that while overall delinquency rates remain near historic lows, elevated FHA loan delinquencies are a growing concern for non-agency RMBS investors. The risk is particularly pronounced in builder-originated loans, where underwriting standards have been criticized for prioritizing sales over long-term borrower sustainability. For MBS investors, this means a heightened need to differentiate between high-quality agency RMBS and riskier non-agency segments, especially in markets with high concentrations of FHA-backed mortgages.

MBS Investment Opportunities: Balancing Risk and Return

Despite these risks, the MBS market remains an attractive asset class for investors willing to navigate its complexities. The Federal Reserve's dovish monetary policy and rate cuts in Q3 2025 have supported prepayment activity, making discount-priced non-agency RMBS an appealing option. Additionally, the Voya report highlights the resilience of prime jumbo and credit risk transfer (CRT) segments, which continue to offer competitive yields amid low delinquency rates according to the report.

For agency RMBS, the increased GSE purchase caps and potential structural reforms could enhance liquidity and reduce spreads, particularly if Ackman's merger proposal gains traction. However, investors must remain cautious about the long-term implications of expanded guarantees, including the potential for moral hazard and systemic risk in a market already burdened by $9.1 trillion in government-guaranteed mortgages.

Conclusion: A Market at a Crossroads

The 2025 updates to federal mortgage guarantees reflect a dual mandate: expanding access to affordable housing while navigating the risks of a fragile market. For MBS investors, the key lies in balancing the opportunities created by policy-driven demand with the inherent risks of underwater mortgages and structural uncertainties. As the housing market evolves, close monitoring of GSE reforms, FHA performance, and regional housing trends will be essential to unlocking value in this dynamic asset class.