The Trump administration has proposed numerous policies aimed at lowering mortgage rates, but will they actually improve home affordability? (Photo by Mario Tama/Getty Images)
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On January 8, the Trump administration announced a proposal for Fannie Mae and Freddie Mac to buy up to $200 billion in mortgage-backed securities with the goal of lowering mortgage rates and increasing home affordability.
While this proposal may marginally reduce mortgage rates, it will not have the desired impact—significantly lowering rates to the level where average homeowners can refinance existing debt. The administration has offered other policies that may help, but the most impactful will be those designed to lower longer-term interest rates.
How Are Mortgage Rates Determined?
A quick review of how mortgage rates are determined can help market participants understand why buying $200 billion in MBS will only have a minimal impact.
Like most other loan rates, mortgage rates are a function of bond market interest rates, particularly US Treasury rates. The rate on a 30-year mortgage can be viewed as a combination of the interest rate on a US Treasury bond plus an extra rate to compensate the lender for the added risk. This amount is the interest rate spread over safe-haven US Treasury bonds.
As an example, the interest rate on the 10-year US Treasury was 4.22% and the average mortgage rate according to Bankrate.com was 6.20% on January 16. The spread, or the difference, of 2.02% is the amount lenders require, on average, to underwrite the mortgage.
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There is a strong correlation between mortgage rates and Treasury rates. As a result, when longer-term Treasury rates move lower, mortgage rates move lower.
Bankrate.com/National Association of Realtors/Bloomberg/Fidelis Capital
Looking at the above chart, there is a strong correlation between mortgage rates and Treasury rates. A regression analysis from 2000 to present shows an 83% R2 value. As a result, when longer-term Treasury rates move lower, mortgage rates move lower, and vice versa. A 10-year Treasury rate is used in this example for simplicity, but longer-term Treasuries with maturities in the 7- to 10-year range show similarly strong correlations.
The Real Impact Of The US Government Buying Mortgage-Backed Securities
While the purchase of $200 billion in MBS will lower the spread in the near term, it will not substantially lower Treasury interest rates, which has the biggest input in mortgage rates. To be clear, the reduction in spread can lower overall mortgage rates, but only to a limited extent.
For example, if the planned MBS purchases decrease the spread to 1.8%, the average level over the last 25 years, that will mean a reduction in underlying mortgage rates of 0.20%, or an average mortgage rate of approximately 6.0%, given today’s average. Mortgage rates would have to go much lower than 6% to spur significant housing activity.
One of the main hurdles to home affordability is the lack of existing home supply. Current homeowners are reluctant to sell because their existing mortgage rate is much lower than current rates.
The average interest rate for outstanding mortgages is 4.4% as of Q3 2025, according to the Federal Housing Finance Agency. To meaningfully add supply to the housing market, mortgage rates would have to move closer to 4.4% to entice home selling.
The One Proven Way To Lower Mortgage Rates
If the goal of the administration is to lower mortgage rates, then the focus should be on lowering longer-term Treasury rates. A reduction in the fed funds rate may have an impact, but not as much of an impact as lowering Treasury rates.
A similar regression analysis to the one above shows only a 66% R2 between the fed funds rate and mortgage rates compared to 83% R2 between the 10-year Treasury rate and mortgage rates.
To reduce longer-term Treasury rates, the focus should be on reducing inflation and inflation expectations, as well as reducing budget deficits. No doubt a difficult task for both fiscal and monetary policymakers, but this will have the most meaningful impact on increasing housing affordability.
Where Does Housing Affordability Stand Today?
While mortgage rates are the most important factor in affordability, there are other factors to consider.
The National Association of Realtors attempts to quantify housing affordability through the calculation of their Home Affordability Index. The inputs to this index are the following: mortgage rates, single-family home prices, and average family income.
It then determines from the data if the average family can qualify for a mortgage to buy the average single-family home based on current mortgage rates, including fees, closing costs and a 20% down payment.
Since the pandemic, housing affordability has been hanging around lows last seen in 2005.
National Association of Realtors/Fidelis Capital
An index value of over 100 means that the average family has the resources to afford the average home. The higher the value, the more home ownership is affordable to the average borrower.
The index’s current value of 108—as of December—means that the average family earns 108% of the income needed to qualify for a mortgage to buy the average home. It is clear from the chart that home affordability has hit new lows in the years following the pandemic as interest rates moved higher.
Will Any Of Trump’s Proposed Policies To Improve Housing Affordability Be Effective?
Outside of a reduction in rates, there are other policies that can help to increase home affordability by reducing fees, increasing the supply of existing homes and increasing incomes.
In the past few weeks, the Trump administration has proposed potential policies designed to increase affordability. Details have been lacking, and of course those are important, however, it is still possible to analyze the impact of each.
#1. Allow Homebuyers To Use Their 401(k) To Contribute To The Down Payment Without Early-Withdrawal Tax Penalties
This will help increase affordability, specifically for first-time borrowers struggling to amass the 20% needed for the down payment. This does come with added risk, as a mortgage default could impair the borrower’s retirement nest egg. The details will be important in this proposal.
#2. Allow For 50-Year Mortgages
It’s unclear whether such a mortgage will reduce the monthly principal and interest amount as lenders will require a higher interest rate to compensate for the longer-term commitment. Additionally, the borrower will not be able to build equity as quickly as a 30-year mortgage.
#3. Ban Institutional Buyers Of Single-Family Homes
A report by the Government Accountability Office released in 2024 shows that, overall, institutional buyers did not own a sizable number of single-family homes, only 1-2%. However, in some specific markets, their ownership of single-family rental units exceeded 10%. This proposal could help affordability in those localities by lowering demand but have a negligible impact nationally.
#4. Allow For Portable Mortgages
The ability of a borrower to keep their current low mortgage rate by transferring it in part or its entirety to a new property certainly appeals to existing homeowners with low rates. Any time you give the borrower more options, the better. However, lenders will require additional compensation for this option, and the result may increase fees and introduce eligibility requirements. Also, this policy does not help new homebuyers.
What Other Policies Should Be Considered To Improve Housing Affordability?
There are other proposals I think policymakers, lenders and insurers should consider.
#1. Use Blockchain Technology And Agentic AI To Reduce Fees And Streamline Mortgage Underwriting
Blockchain technology used in title searches can reduce fees as well as increase security and transparency. According to a recent Forbes article, the use of agentic AI has many advantages over the traditional processes that would provide meaningful support for the “labor-intensive” mortgage industry.
#2. Address Ballooning Home Insurance Premiums
According to a recent report from the US Treasury, homeowner insurance premiums have been increasing at a rate of 8.7% more than inflation in 2018-2022. Realtor.com estimates that insurance premiums could increase another 16% in 2027. State insurance regulators have been increasingly pressuring insurance companies to reduce rates, with varying success.
#3. Increase Housing Supply By Decreasing Building Regulations And Property Taxes
This is particularly important in regions of the country where they are excessive. According to The National Association of Home Builders, regulatory costs can add up to 25% to the total cost of a new single-family home.
The Bottom Line: Home Affordability Overwhelmingly Comes Down To Longer-Term Treasury Rates
Home affordability is a problem that both Democrats and Republicans have acknowledged. Although it has marginally increased from record low levels in recent months, there is significantly more room for improvement.
The various proposals on the table should be fully vetted, and there are other ideas that should be explored. But, it is clear that the most meaningful impact will be lower interest rates, specifically 7- to 10-year Treasury rates. Other actions can help at the margin, but an increase in longer-term Treasury rates will trump any of the proposed policies and home affordability could weaken further.