President Trump on Thursday announced that he will use Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac to buy up mortgage-backed securities (MBSs), essentially creating a new kind of quantitative easing designed to artificially increase liquidity for mortgages in the United States.
Trump wrote in a post on Truth Social he is “instructing my Representatives to BUY $200 BILLION DOLLARS IN MORTGAGE BONDS … This will drive Mortgage Rates DOWN, monthly payments DOWN, and make the cost of owning a home more affordable,” Trump wrote on Thursday afternoon. “It is one of my many steps in restoring Affordability, something that the Biden Administration absolutely destroyed.”
Trump further stated “We’re going to be using the full force of Fannie to reverse the damage that [former president Joe] Biden did these last four years, including, but not limited to, strategic and large purchases of mortgage bonds,”
Administration representatives offered few details on how exactly this will be done but administration official Bill Pulte, head of the Federal Housing and Finance Agency (FHFA), stated that Fannie and Freddie will purchase the $200 billion in mortgage-backed securities from the public market.
The idea here is that by having the GSEs—which are effectively government-owned corporations—purchase more bonds, this will pump liquidity into mortgage markets and help push down interest rates.
This is the same logic behind the Federal Reserve’s purchase of more than a trillions dollars worth of MBSs from 2008 to 2010. As demand for housing fell—and home prices with them—the Fed bought up MBSs as a way to bailout banks and other owners of collapsing MBSs. Ever since then, the Fed and the Federal Government’s obsession with driving up asset prices—to benefit older and wealthier voters at the expense of the young and others with fewer assets—has turned the Fed into what is essentially a giant Savings and Loan. The result has been lower interest rates, but higher prices.
After more than 15 years of this, the result has been lower affordability for first time homebuyers. Why? Well, it’s partly due to the fact that incessant efforts to push down interest rates also leads to price inflation which has led to a higher cost of living overall. This places more people out of reach of homeownership.
Now, it looks like Trump is attempting to do something similar with a new type of quantitative easing of his own. Amidst his feud with Fed and Fed Chairman Jerome Powell, Trump likely feels he won’t be received enthusiastically if he goes to the Fed demanding more QE in the form of MBS purchases. So, Trump has gone to the GSEs which he can more easily control.
The GSEs can’t make purchases with newly created money in the way that the central bank can, however. So where will the GSEs get the money to buy hundreds of billions in MBSs? The Trump administration claims that the GSEs are sitting on piles of cash. So, Trump wants to tap into this cash to buy up MBSs in his quest to pump more home purchases.
The end game here is the same as what it was with QE executed by the Fed. But now there is an additional step added. If the GSEs are using its cash reserves to buy up housing assets, that “deal” can go south very quickly when home prices start to fall. That then leads to a bailout from the central bank.
Or, as Politico recently noted:
Michael Bright, CEO of the financial services industry group Structured Finance Association, said in an interview that a $200 billion purchase “lower rates by a little bit,” but exposes Fannie and Freddie to serious risks if the market turns. … “It exposes them to the exact same risks that got them blown up” in 2008, Bright said.
The act of getting “blown up” that Bright is referring to is the 2008 implosion of Fannie and Freddie which resulted in their takeover by the Federal Government. This was essentially a bailout of GSE investors, and the Fed was key in this equation. Specifically, the MBS assets that the Fed was buying up were so-called “agency MBS” which are the MBSs backed by Fannie and Freddie. So, basically, when Fannie and Freddie get in Trouble, the Fed steps in a bails them out. The bailout requires newly created money and the result is the monetary inflation we’ve seen as a result of the Fed’s many bailouts since 2008.
So, in the end, if the administration forces the GSEs to buy up more MBS with its cash reserves, and then the “market turns” then the GSE don’t even have cash to ease the collapse, and it’s back to direct bailouts and QE from the Fed. Having the GSEs carry out the first step of this new type of QE just slightly lengthens the process.
In the end, if this plan is carried out, Trump will get what he presumably wants anyway: more inflation, more QE, and more easy money from the central bank.
