Fannie, Freddie mortgage buying unlikely to drive rates

Core Insights - The GSEs (Fannie Mae and Freddie Mac) are no longer the dominant force in the mortgage-backed securities (MBS) market as they were before the 2008 financial crisis, with their retained portfolios now accounting for only about 3% of the outstanding market [9][12][24] - Recent instructions from former President Donald Trump to the GSEs to purchase $200 billion in MBSs may not significantly impact the rates market due to the reduced scale of their hedging activities compared to the past [15][16][17] - The GSEs' retained portfolios have increased to $272 billion as of December, up $93 billion (52%) from May, but this growth is still modest relative to the overall market size [7][23][24] Group 1: GSEs' Market Position - The GSEs held more than $1 trillion of MBSs before the financial crisis, representing roughly a third of the market, but have since reduced their holdings significantly [9][12][14] - The Federal Reserve and commercial banks now hold a combined total of approximately $4.7 trillion in MBSs, which is about half of the market [7][24] - The GSEs' hedging activities have diminished, leading to a lack of significant influence on the rates market as they no longer manage a substantial duration gap [14][27] Group 2: Recent Developments - The Federal Housing Finance Agency clarified that the GSEs would be the buyers of the MBSs, with the combined incremental purchases not exceeding $200 billion [8][15][23] - Analysts expect that while the GSEs' purchases may affect MBS spreads, they are unlikely to have a major impact on the Treasury market due to insufficient hedging [6][17] - The GSEs' current cash reserves and potential MBS purchases could offset the Federal Reserve's ongoing balance sheet runoff, which has led to a decline in MBS holdings [24][29] Group 3: Market Dynamics - Nearly half of homeowners currently have mortgages at rates of 3% or less, indicating that significant refinancing activity would require a substantial drop in rates [28][29] - The longer high rates persist, the greater the future refinance exposure becomes as new mortgages are issued at higher rates [29] - The GSEs' past strategies involved extensive hedging through interest rate derivatives and Treasuries, which created volatility in the market, a dynamic that is less pronounced today [12][26][27]