In recent months, Fannie Mae and Freddie Mac have added billions in mortgage-backed securities and home loans to their balance sheets, fueling market speculation that they are attempting to lower mortgage rates and boost profitability ahead of potential public listings.
Latest data shows the two government-backed housing finance giants expanded their retained portfolios—the portion of bonds and loans they hold rather than sell to investors—by over 25% in the five months through October. Their combined holdings now stand at $234 billion, the highest since 2021. Analysts estimate they could add up to $100 billion more next year.
While Trump administration officials have remained silent on MBS purchases, they’ve repeatedly stated this year that Fannie and Freddie’s financial strength would be leveraged to reduce housing costs. Policymakers are also laying groundwork to return the companies to public markets nearly two decades after their government takeover. Larger retained portfolios could enhance profitability and investor appeal for future offerings.
Currently, the impact is most visible in the $9 trillion U.S. agency MBS market. As the GSEs aggressively buy bonds, they’re limiting securities supply and supporting prices. Their large-scale purchases during spread widening may also dampen market volatility and alter risk assessment frameworks.
"One of the most direct ways to lower mortgage rates is directing GSEs to buy more mortgage bonds," said DoubleLine Capital portfolio manager Vitaliy Liberman. "This administration is evaluating all options." Neither Fannie, Freddie, nor their regulator FHFA responded to repeated requests for comment.
Historically used as short-term warehousing for loans awaiting securitization, retained portfolios ballooned in the 1990s-2000s as the companies borrowed cheaply to invest in higher-yielding MBS. By 2008, combined holdings exceeded $1.5 trillion, becoming their primary profit engine—until the financial crisis exposed massive losses from risky private-label holdings and excessive leverage, triggering government conservatorship.
Post-crisis, Treasury forced asset sales and imposed strict portfolio caps. By 2022, holdings had shrunk to $158 billion. But recent months saw a $50+ billion rebound, leaving $200+ billion below caps for further growth. This unexplained expansion has analysts speculating about motives and 2025 targets.
One theory suggests the buildup aims to gently pressure mortgage rates downward. By retaining more loans, GSEs reduce MBS supply, compressing yields that influence borrowing costs. This aligns with the administration’s affordability push, including FHFA’s exploration of 50-year mortgages and Trump’s public calls for GSE action.
Despite Fed rate cuts, 30-year mortgage rates remain above 6%. Citi predicts Fannie and Freddie could add $1 trillion in combined holdings by 2026, potentially compressing MBS risk premiums by 0.25 percentage points—with partial or full passthrough to consumers.
"With Treasury still as majority owner, government retains significant influence," said FHN Financial strategist Walt Schmidt. "This provides a flexible rate-cutting tool, Fed-like in nature." Meanwhile, the Fed continues shrinking its MBS holdings via passive runoff.
Market observers note expanded portfolios could also facilitate IPOs. More MBS holdings mean greater interest income and potentially higher profits—addressing concerns about profitability versus debt that could hinder stock offerings. The administration has begun preparatory work, including informal investment bank discussions. Commerce Secretary Howard Lutnick recently stated IPOs would proceed "sooner rather than later."
"Demonstrating earnings growth is essential to attract IPO investors," said Columbia Threadneedle’s Jason Callan. Regardless of motive, analysts say GSEs’ renewed market presence may reshape MBS dynamics. After three years where asset managers dominated as marginal buyers post-Fed retreat, Fannie and Freddie’s resurgence could recenter pricing power.
"If portfolio expansion continues, they’ll become top-tier buyers demanding close investor attention," warned Wells Fargo’s Mario Iachaso. "The market mantra will shift to ‘don’t fight the GSEs.’"
Even moderate growth rekindles debates about appropriate risk levels. "Approaching pre-2008 portfolio sizes would raise major political concerns," said BofA’s Jenna Kuro. "Though underwriting improvements make MBS safer, significant expansion would require tight oversight."
Few expect a return to pre-crisis excesses that drew scrutiny for market distortions. But investors note current policy priorities could permit measured growth. "This administration prioritizes economic wins—using GSEs to lower rates aligns perfectly," said Balbec Capital’s Brian Simon. "More MBS purchases may emerge on the agenda, even if not yet visible."
Comments