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After dipping below the 6 per cent mark, the average cost of a box-fresh US 30-year mortgage is climbing again, as rising inflation expectations lift the Treasury yields that act as a benchmark for residential lending.
As you can see below, it’s still far away from the two-decade high of 7.79 per cent it peaked at in 2023, after the Federal Reserve had aggressively jacked up interest rates to quell the post-pandemic inflation surge. But it’s not great for a Trump administration keen to tout AfFoRDaBiLIty ahead of the midterm elections later this year.
Pimco therefore has some advice for Washington on how it can increase the value of its positions bring mortgage rates lower and make housing more affordable. We can’t find the paper online so here’s our precis of the arguments offered by Pimco’s Libby Cantrill, Dan Hyman and Munish Gupta.
Some are obvious, like getting the two government-owned housing giants Fannie Mae and Freddie Mac to spend even more on purchasing mortgage-backed securities than the $200bn already announced, or to be more targeted in what they buy.
While naturally stressing that the Federal Reserve “should remain independent” — 😉😉😉 — Pimco also points out that the US central bank simply stopping the run-off of MBS from its balance sheet would also bring mortgage rates down.
Then there’s stuff like modifying the government-sponsored entities’ rules on the number of allowable investment properties (or at least not banning institutional ownership, as Trump has suggested); ending homebuilder buydowns; and not cutting the “g-fee” that the GSEs charge to cover the cost of guaranteeing mortgages:
We do not believe that policymakers need to (or should) cut the “g-fee,” the fee that GSEs charge to cover the costs of guaranteeing an underlying mortgage. These fees are small relative to the overall mortgage rate and are an important component of Fannie and Freddie’s profitability and capital accumulation. Indeed, given the cloud of uncertainty in the market regarding this issue, mortgage rates could decline by five to 10 bps if policymakers were to simply announce that they will not cut the g-fee.
If policymakers pursue this idea, we believe it is essential that the g-fee reduction be limited to first-time homebuyers and not those looking to refinance. If a g-fee cut were implemented across-the-board, it would likely lead to higher, not lower mortgage rates.
However, most intriguing to Alphaville is the suggestion that the Trump administration simply stopping banging on about privatising Fannie and Freddie could alone reduce mortgage costs by 10 basis points:
We believe the GSEs are doing an excellent job of delivering mortgage liquidity and providing access to mortgage credit, not to mention they are profitable (and at times, significantly so), benefiting taxpayers — a nice reversal, since taxpayers funded the bailout of the GSEs during the 2008 financial crisis.
Despite functioning well in their current state, there has been ongoing discussion and speculation about the possible public offering of Fannie and Freddie stock. We believe talk alone of a GSE IPO may be self-defeating as it raises questions about future government support. This uncertainty can add risk premium to MBS, increasing mortgage rates for borrowers. As such, if the administration were simply to stop talking about a potential IPO of the GSEs, we could see some of this uncertainty premium decrease and rates could decline by ~10bps.
And if the US government really wants to lower mortgage costs even further, the easiest way would be for it to explicitly guarantee all MBS backed by Fannie and Freddie:
. . . Of course, Congress could eliminate this uncertainty altogether — and lower mortgage rates significantly — by passing legislation to explicitly guarantee all GSE mortgage-backed securities. Doing so would provide significant (and welcome) clarity to investors globally about the current and future state of the GSEs and likely lead to even more demand from investors. Such a change could also lead to increased appetite for MBS from banks due to better risk-weighting under the existing capital treatment rules.
Of course, this is a ca $10tn liability the US government would legally be moving on to its balance sheet. But it’s not as if anyone really believes that the US could, should, or ever would let Fannie, Freddie and the rest collapse. The clearly revealed preference from 2008 is that it will do anything it can to prevent that, and maybe it’s time to recognise that formally?
