Fannie Mae and Freddie Mac quietly increased their holdings of tens of billions in mortgage-backed securities, paving the way for lower interest rates and an IPO.

In recent months, Fannie Mae and Freddie Mac have increased their mortgage-backed securities and housing loans on their balance sheets by billions of dollars, sparking market speculation: as they prepare for a potential public listing, they are trying to lower loan rates and increase profitability. Recent data shows that in the five months leading up to October, these two government-backed housing finance giants increased their retained investment portfolios (the bonds and loans they hold instead of selling to investors) by over 25%. This brings their combined holdings to $234 billion, the highest since 2021. Analysts estimate they could increase by up to $100 billion next year. While Trump administration officials have remained silent on the MBS purchases, they have repeatedly stated this year that they will use Fannie Mae and Freddie Mac's financial strength to lower housing costs. Policymakers have also been paving the way for these two companies to return to the public market, nearly twenty years since they were taken over by the government. A larger retained investment portfolio could boost their profits and enhance their attractiveness to investors in any future offerings. However, the impact is currently mainly seen in the $9 trillion U.S. agency MBS market. As these two government-supported enterprises buy bonds in bulk, they are limiting the amount of securities entering the market and supporting their prices. Additionally, the involvement of the two large buyers when spreads widen may also curb market volatility and change the way investors assess risk in the process. "If you want to lower mortgage rates, one of the most direct ways is to instruct GSEs (government-sponsored enterprises) to buy more mortgage-backed securities," said Vitaly Liberman, portfolio manager at DoubleLine Capital. "This administration is looking at everything." Representatives from Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency, did not respond to multiple requests for comments. Retained investment portfolios have long been used as a short-term channel for loans awaiting securitization, and expanded rapidly in the 1990s and 2000s as the two companies increasingly used their low-cost borrowing to invest in high-yield mortgage-backed bonds to boost profits. By 2008, their combined holdings had swollen to over $1.5 trillion, and their investment portfolios had become the main profit engine for Fannie Mae and Freddie Mac. They not only held safer agency bonds, but also a large amount of private-label bonds and other assets that turned out to be far riskier than anticipated. When the real estate market collapsed during the financial crisis, these positions and the leverage behind them resulted in huge losses, leading to the government takeover of both companies. Since then, the Treasury Department has forced the two companies to sell assets and imposed strict limits on the size they can hold. By the end of 2022, their retained investment portfolios had shrunk to just $158 billion. However, asset size has once again risen, increasing by over $50 billion in the five months leading up to October. Even after this latest surge, the companies' holdings are still over $200 billion below the limit, leaving ample room for further growth. This growth has caught the attention of analysts, who say that with little official explanation, Wall Street can only speculate on what is driving this shift and how much the GSEs may increase next year. Lowering mortgage rates One view is that the increase is aimed at gradually lowering mortgage rates. By keeping more loans on their own books rather than selling them to the market, the GSEs reduce the supply of MBS available to investors, a shift that can compress yields and thus lower loan rates. This expansion comes as the Trump administration intensifies its focus on housing affordability. Treasury Secretary Scott Bennett stated in September that the president may declare a "national housing emergency." More recently, FHFA Director Bill Pulte said the agency is exploring creating 50-year mortgages to ease monthly payment pressure, while President Donald Trump urged Fannie Mae and Freddie Mac to "get large homebuilders moving" in a social media post. Despite the government's push, mortgage rates have remained high since the Fed started raising rates in 2022 to curb inflation. Even after cumulative rate cuts of 1.75 percentage points since 2024, the average rate for a 30-year fixed-rate mortgage remains above 6%. Citigroup predicts that Fannie Mae and Freddie Mac will increase their combined retained investment portfolios by around $100 billion in 2026, with a potential increase to $250 billion. The bank estimates that such growth could compress MBS risk premiums by around 0.25 percentage points, some or all of which may be passed on to consumers in the form of lower mortgage rates. "With Fannie Mae and Freddie Mac still largely owned by the Treasury Department, the government still has significant influence over them," said Walter Schmidt, strategist at FHN Financial. "This gives them a flexible tool for rate cuts, similar to the Fed." The Fed has been allowing its holdings of mortgage-backed securities to naturally shrink from its balance sheet since 2022. Market observers suggest that expanding the retained investment portfolios could also lay the groundwork for a public listing. Holding more MBS on the balance sheet means more interest income and potentially higher profits, and doubts about their profitability relative to debt are still obstacles to any stock offering. The Trump administration has already begun paving the way, including informal contacts with investment banks to discuss potential offerings. Commerce Secretary Howard Lautnik said earlier this month that the IPOs of the two companies will be conducted "sooner rather than later." "If you intend to lift them out of receivership and make them profit-seeking entities, this will be a starting point," said Jason Carlin, co-head of structured assets at Columbia Threadneedle. "Investors in an IPO will only be interested in holding their stock if Fannie Mae and Freddie Mac can demonstrate profit growth." MBS tailwinds Analysts say that regardless of the motives, the new demand source in the MBS market could change the delicate balance that determines bond prices and yields. A larger retained investment portfolio could lower risk premiums, suppress daily volatility, and change the market dynamics investors have become accustomed to. GSEs could once again become a key force in the market. Over the past three years, the focus in the market has been on fund managers, who have become marginal buyers after the Fed reduced its MBS purchases. If Fannie Mae and Freddie Mac continue to increase their holdings, this situation may change. "If the expansion of the GSE portfolios continues, they will become one of the most important buyers in the market, forcing investors to closely watch their every move," said Mario Icazzo, strategist at Bank of America. "The market's credo will become 'do not go against GSEs'." Even with moderate portfolio growth, it could reignite a long-standing debate: how much risk should these companies take on? Will expanding their holdings lead them down the path of continual balance sheet expansion? "If Fannie Mae and Freddie Mac start accumulating their portfolios close to pre-2008 levels, it will raise significant political concerns," said Jenna Kuro, strategist at Bank of America. "Stricter underwriting standards make mortgage-backed securities safer than before, but we expect that if they increase holdings significantly, strict oversight will still be necessary." Few expect a return to the pre-crisis pattern, where the companies' massive investment portfolios were scrutinized for distorting the market and masking risks. But investors say the current policy backdrop makes at least some degree of portfolio expansion possible. "The current administration is more focused on economic growth, and securing wins in housing policy is crucial," said Brian Simon, managing director at alternative credit investment firm Balbec Capital. "Buying more mortgage-backed securities to help lower rates and achieve other goals is likely to be on the agenda, although we have yet to see this become reality."