Fannie Mae and Freddie Mac quietly increased their mortgage bond holdings by several billion dollars, paving the way for interest rate cuts and IPOs

The Zhitong Finance App learned that in recent months, Fannie Mae and Freddie Mac have added billions of dollars in mortgage-backed securities and housing loans to their balance sheets, which has sparked market speculation: as they prepare for a potential public listing, they are trying to lower loan interest rates and increase profitability.

The two government-backed housing finance giants increased their own portfolios (that is, the portion of bonds and loans they hold rather than sell to investors) by more than 25% in the five months up to October, according to the latest data. This raised its consolidated holdings to US$234 billion, the highest since 2021. Analysts estimate they could increase by as much as $100 billion next year.

Although Trump administration officials are silent about MBS purchases, they have said many times this year that they will use the financial strength of Fannie Mae and Freddie Mac to reduce housing costs. Policymakers have also been paving the way for the two companies to return to the open market, almost 20 years since they were taken over by the government. A larger self-owned portfolio is likely to boost its profitability and make it more attractive to investors in any future offering.

Currently, however, the impact is mainly reflected in the $9 trillion US institutional MBS market. As these two governments support companies to buy bonds in droves, they are curbing the amount of securities flowing into the market and supporting their prices. Furthermore, when interest spreads widen, two large buyers intervene, which may also curb market fluctuations and change the way investors assess risk in the process.

“If you want to lower mortgage interest rates, one of the most direct ways is to instruct GSE (government backed enterprises) to buy more mortgage bonds,” said Vitaly Lieberman, portfolio manager at DoubleLine Capital. The current administration is looking at all possibilities.”

Representatives from Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency, did not respond to multiple requests for comment.

Owned portfolios have long been used as a short-term channel for loans awaiting securitization, and expanded rapidly in the 1990s and 2000s, as both companies increasingly used them to borrow at low cost and invest in high-yield mortgage bonds to boost profits.

By 2008, their consolidated holdings had swelled to over $1.5 trillion, and their portfolios had become the main profit engine for Fannie Mae and Freddie Mac. Nor are they limited to safer institutional bonds, but also hold large numbers of private-label bonds and other assets that ultimately prove far riskier than anticipated. When the real estate market crashed during the financial crisis, these positions and the leverage behind them led to huge losses, leading to both companies being taken over by the government.

Since then, the Ministry of Finance has forced the two companies to sell assets and imposed strict caps on how much they can hold. By the end of 2022, their self-owned portfolio had shrunk to just $158 billion.

But now, the size of assets has risen again, adding more than $50 billion in the five months ending October. Even after this jump, the two companies' holdings were still more than $200 billion below the upper limit, leaving plenty of room for subsequent growth. This increase has caught the attention of analysts, who said that with little official explanation, Wall Street can only speculate on what is driving this shift and how much GSE is likely to increase next year.

Lower mortgage interest rates

According to one view, the purpose of increasing holdings is to moderately lower mortgage interest rates. By keeping more loans on its own books rather than selling it to the market, GSE reduces the supply of MBS that investors can get. This shift can reduce yields, which in turn reduces loan interest rates.

This expansion comes at a time when the Trump administration is focusing more on housing affordability. Treasury Secretary Scott Bessent said in September that the president might declare a “national housing emergency.” Recently, FHFA Director Bill Poulter said that the agency is exploring the creation of 50-year mortgages to ease the pressure on monthly payments, while President Donald Trump urged Fannie Mae and Freddie Mac in a social media post to “get big homebuilders to act.”

Despite strong government push, interest rates on mortgages have remained high since the Federal Reserve began raising interest rates in 2022 to curb inflation. Even after cutting interest rates by 1.75 percentage points since 2024, the average interest rate for 30-year housing loans is still above 6%. Citigroup predicts that Fannie Mae and Freddie Mac will increase their combined proprietary portfolio by about $100 billion in 2026, and there is a possibility that it will increase to 250 billion US dollars. The bank estimates that such growth could reduce the MBS risk premium by about 0.25 percentage points, some or all of which will be transferred to mortgage interest rates paid by consumers.

“Since Fannie Mae and Freddie Mac are still mostly owned by the Treasury, the government still has a lot of influence over them,” said Walter Schmidt, strategist at FHN Financial. It gave them a flexible tool to cut interest rates, similar to the Federal Reserve.” The Federal Reserve has been allowing its mortgage bond holdings to naturally shrink from the balance sheet since 2022.

Market observers said that expanding self-owned investment portfolios may also lay the foundation for a public listing. Having more MBS on the balance sheet means more interest income, and possibly higher profits, and doubts about its profitability versus debt are still an obstacle to any stock issuance at this time.

The Trump administration has begun paving the way, including informal contacts with investment banks to discuss potential issuance matters. Commerce Secretary Howard Lutnick said earlier this month that the two companies' IPOs will take place “sooner rather than later.”

“If you plan to move them out of takeover and make them profit-seeking entities, then this is a starting point,” said Jason Callan, co-head of structured assets at Columbia Threadneedle. “Investors in an IPO will only be interested in holding Fannie Mae and Freddie Mac if they can show profitable growth.”

MBS Good Breeze

Regardless of the motivations, analysts said the new sources of demand in the MBS market could change the delicate balance that determines bond prices and yields. A larger proprietary portfolio may lower risk premiums, curb daily fluctuations, and alter market dynamics that investors have become accustomed to.

GSE is also likely to become a core force in the market again. Over the past three years, the market's focus has been on fund managers, who became marginal buyers after the Federal Reserve cut back on MBS purchases. If Fannie Mae and Freddie Mac continue to increase their holdings, the situation may change.

“If the expansion of the GSE portfolio continues, they will become one of the most important buyers in the market, which will force investors to keep a close eye on their every move,” Wells Fargo strategist Mario Ichazo said. The market creed will become 'don't go against the GSE'.”

Even modest portfolio growth could reignite a long-standing debate: How much risk should these companies take? Will expanding their holdings put them on a path of balance-sheet expansion?

“If Fannie Mae and Freddie Mac start to re-accumulate their portfolios to levels close to pre-2008 levels, it will raise huge political concerns,” Bank of America strategist Jenna Currow said. Stricter underwriting standards make mortgage bonds safer than before, but we expect they will still need to be strictly regulated if they increase their holdings significantly.”

Few expected a return to the pre-crisis model, when the two companies' huge portfolios were scrutinized for distorting markets and masking risk. However, investors said that the current policy context makes it possible to expand the portfolio to at least a certain extent.

“The current administration is more focused on economic growth, and winning the housing policy is critical,” said Brian Simon, managing director of alternative credit investment firm Balbec Capital. Buying more mortgage bonds to help lower interest rates and meet other goals is likely to be on the agenda, although we haven't seen this become a reality.”