00:00If Fannie and Freddie buy up these mortgage bonds, I get supply demand, you buy it up, what happens in terms of rates, but how would it work and what impact would it really have?
00:08Hi, thanks for having me on today. Yeah, I've been looking at this, you know, pretty hard in the last 24 hours or so.
00:15It's not entirely unexpected. We've been observing that the GSEs had actually been adding agency mortgage-backed securities already since July or so to the tune of, I would guess, about $40 billion.
00:26So buying up.
00:26They've been buying them anyway, so this would be another $200 billion, five times that.
00:31And, you know, I will say that the spread impact has been fairly substantial so far.
00:36It's not just about them buying. It's also that volatility has come down.
00:40But combined, you know, spreads are about 40 basis points.
00:43We're about, before this announcement, about 40 basis points tighter.
00:46And, you know, of course, we've seen mortgage rates come down from 7% earlier this year after the tariff ruling to more like, you know, low 6s, 6.16 for conventional 30 years, below 6s.
00:58So it works?
01:00Well, again, it's mostly about volatility, actually, which has also come down.
01:04And that's partly because people think that the Federal Reserve is actually more on a glide path.
01:10So, you know, this throws some wrinkles in the equation.
01:13For instance, now, if higher demand for homes without more supply means that home prices go up, that could boost inflation.
01:20So there could be a lot of offsetting factors, both from affordability as well as mortgage rates.
01:26Yeah, I'm glad you brought that up because a big part of our conversation, like, this is all about the president trying to make homes more affordable for Americans.
01:33And if we think about it from the perspective of what's happened this week, what he said publicly about not wanting institutional investors to buy single-family homes,
01:41none of that necessarily addresses the supply side of this, which a lot of economists argue this is the issue.
01:46It's a zoning issue. This is a local issue.
01:48The question I have for you is what has Fannie and Freddie end up doing with these assets and how long do they have them on their balance sheets?
01:56I mean, this is actually a pretty small drop in the bucket, both relative to what they used to own.
02:01For now, though, like maybe they could do more.
02:04Well, they're statutorily capped because of what happened in 2008 after they got taken into conservatorship.
02:11So they've been working really hard to decrease the size of their portfolios.
02:15And now, you know, of course, they're beginning to grow them again.
02:18So they're kind of capped as to about $200 billion.
02:21To put that in context, the Federal Reserve, after COVID hit and people were worried about housing and financial markets freezing up, bought almost $600 billion in two months.
02:31So just to put that in context.
02:33Now, that had a pretty big spread tightening effect and it lowered rates because they were buying treasuries at the same time.
02:38You know, in contrast, the GSEs probably are going to have to hedge their mortgage-backed security holdings.
02:45So they'll probably be selling rates into the market at the same time they're buying mortgage-backed securities.
02:50So this is about spread tightening.
02:51Yeah.
02:52And spreads have already tightened basically to equilibrium levels.
02:55So they can tighten a little bit more in the short run.
02:57But you might also have relative value investors selling at the same time.
03:02You know, the active money managers are all overweighted.
03:05I could see them taking their weights down to zero.
03:07That could offset a lot of the gains from spread tightening.
03:10So bottom line, there are roughly $9 trillion worth of agency mortgage bonds outstanding.
03:14It's a massive market.
03:15So bottom line, just 30 seconds.
03:17More bark than bite in terms of what we're getting from the president rather than a policy, a substantial policy that would address affordability.
03:24They will be taking out a substantial amount of current supply.
03:28So rates may come down a little bit.
03:29But even a 25 basis point decrease in rates isn't going to move the needle from an affordability standpoint, especially if home prices rise.
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