The last time the 30-year fixed-rate mortgage had a weekly average below 6% was in September of 2022, according to Freddie Mac data. During the ensuing three years, the 30-year rate averaged 6.73%, reaching as high as 7.79% in October 2023 and as low as 6.08% during September 2024.
A pair of mortgage trade groups have proposed a plan they believe will help lower those stubbornly high rates by addressing the “secular and structural decline in demand for mortgage-backed securities.”
In a letter addressed to Treasury Secretary Scott Bessent and Federal Housing Finance Agency (FHFA) Director Bill Pulte, the Community Home Lenders of America (CHLA) and the Independent Community Bankers of America (ICBA) laid out steps they think could reduce mortgage rates by 30 basis points or more by narrowing the spread between 30-year mortgage rates and 10-year Treasury yields, also known as the 30/10 spread.
Specifically, the trade groups propose that the FHFA and the Treasury Department amend Fannie Mae’s and Freddie Mac’s preferred stock purchase agreements to grant those government-sponsored enterprises (GSEs) the ability to purchase their own mortgage-backed securities (MBS) or those of government-owned corporation Ginnie Mae at a higher ceiling than currently authorized.
“Our recommendation is that the GSEs each have the ability to purchase up to $300B of MBS for when the 30/10 spread is above 170 basis points,” they recommended.
The CHLA and ICBA cited second-quarter financial filings showing that Fannie and Freddie are a combined $246 billion below their current MBS caps, “and thus could begin immediately to reduce this spread.”
The 30-year mortgage is benchmarked to the 10-year Treasury rate and is calculated by adding a spread to the 10-year rate. The wider the spread, the higher mortgage rates will be for borrowers.
The letter to Bessent and Pulte notes that as of Oct. 17, the 30/10 spread was 222 basis points, which is well above the normative spread of 140 to 170 basis points.
One reason for the widening spreads since 2022 is the Federal Reserve’s winding down of its MBS purchase program as a part of a broader balance sheet runoff in the post-pandemic era.
“For some 40 years, the Federal Reserve and Fannie Mae and Freddie Mac have acted as buyers of last resort for MBS to stabilize mortgage rates at times and ways that are appropriate,” the CHLA and ICBA wrote. “Today, none of these three organizations provides this functionality.”
Noting that the GSEs’ portfolios have historically served as “shock absorbers” during periods of disruption in the MBS market, the trade groups argued that now is the time for Fannie and Freddie to temporarily step in again to help address housing unaffordability.
“It is time for bold action to help today’s young families afford homeownership, and having the GSEs buy MBS would be both effective and prudent,” CHLA Executive Director Scott Olson stated in a press release. “We are proud that the two preeminent national associations representing community lenders have joined together to ask Treasury and FHFA for action to bring down mortgage spreads back to historical levels.”
