Labeled as “quasi QE”, the directive by the President yesterday for the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, to reinvest a portion of their capital reserves into mortgage-backed securities (MBS), shot bond prices up and mortgage rates down.
Roughly $9 trillion in agency bonds are currently outstanding, making the directive to purchase $200 billion a bit of a flea on the butt, so to speak, but the unexpected event pushed rates lower this morning.
I suggest you grab it if you’ve been thinking of refinancing.
The Impact
Mortgage-backed securities are trading up from close yesterday, and both the Dow and S&P 500 opened higher this morning.
The futures market is pricing in a 95.0% probability of the Fed holding rates steady during the January 28th FOMC meeting, a 29.6% chance of a 25 bps Fed rate cut during the March 18th meeting, and a 7.2% chance of a second 25 bps Fed rate cut during the April 29th meeting (CME FedWatch Tool).
Those stats don’t bode well for too much additional downward movement in mortgage rates. With data available as of this moment, this could be a short window of lower rates.
Fed Policy
Rates have been gently headed down since last September, with softer employment data and inflation remaining relatively calm.
Paired with the Fed policy announcement to end its balance sheet runoff of mortgage-backed securities effective December 1, 2025, we headed into the year optimistic that rates would stay near or below 6% in 2026.
The recent directive is adding to that optimism.
Defining Quantitative Easing
Mortgage rates rise and fall largely in response to the price of mortgage-backed securities (MBS) in addition to other market conditions.
Quantitative easing (QE) is when the Fed buys large amounts of securities, including MBS, to increase demand. Increased demand pushes MBS prices up and helps drive rates down, at least for a time.
The aforementioned balance sheet runoff was the Fed liquidating mortgage security holdings, a practice known as quantitative tightening (QT), which negatively impacts mortgage rates. QT, paired with inflation following the pandemic, is what launched the upward trajectory of mortgage rates that started in 2022.
The GSE Role
The majority of home loans in this country are funded through the GSEs. Tasked with keeping mortgage activity solvent and preventing defaults from significantly impacting financial markets, they maintain a reserve fund.
The requested $200 billion purchase of mortgage-backed securities would come from that GSE reserve, not the Fed. Hence the term, “quasi QE.”
If you want the deep dive on how Fed policy works, this is a great explanation.
The Biggest Wildcard
Since the inception of loan level price adjustments (LLPAs) put in place in response to the default rates after 2008, the GSEs’ reserves have become sizeable. The directive is to liquidate a portion of those reserves.
The question remains how, when, and if the directive will become a reality.
In the meantime, we’ll take it!
