Trump’s Plan To Fix the Housing Market Has Problems, Morgan Stanley Warns

Analysts at Morgan Stanley are skeptical that President Donald Trump's plan to improve housing affordability by driving mortgage rates lower will have much of an impact.

In a research note on Jan. 18, the investment bank's co-heads of securitized products, Jay Bacow and James Egan, said they don't expect Trump's initiatives to significantly change the outlook for mortgage rates, home prices, and sales this year.

In particular, Bacow and Egan were skeptical about Trump's recent plan for Fannie Mae and Freddie Mac to buy $200 billion in additional mortgage bonds.

While the analysts say any reduction in rates would be a positive development, they argue that the impact of the plan will likely be modest, and not enough to move the needle much on rates.

"There's a lot of things that we're still waiting information on. But we think the initial move has sort of been fully priced in," Bacow said in a company podcast. "Just $200 billion, it is probably priced in and then, maybe, and then some."

Trump said on Jan. 8 he would have Fannie and Freddie, which have been under federal control since a 2008 bailout, purchase $200 billion worth of mortgage-backed securities (MBS), which would nearly double their combined holdings and take them close to their regulatory asset cap.

"This will drive Mortgage Rates DOWN, monthly payments DOWN, and make the cost of owning a home more affordable," Trump promised on his Truth Social.

In theory, increasing Fannie and Freddie's MBS holdings should be favorable for mortgage rates through the simple laws of supply and demand. Increasing demand for mortgages makes them more valuable, encouraging lenders to originate more loans at more competitive rates.

While mortgage rates did drop to a three-year low of 6.06% immediately after Trump announced the move, they have already bounced higher, reaching 6.09% last week, according to Freddie Mac.

But Bacow and Egan argue that, even if the president's intervention pushed rates to the upper 5% range, it likely wouldn't spur dramatic change in the housing market.

“While affordability might be improved for the marginal buyer, it won’t necessarily ‘unlock’ substantial additional supply to be purchased,” the analysts wrote.

A recent Realtor.com® analysis found that 69% of current homeowners have a mortgage rate below 5%, reducing their incentive to move and take on a new, higher rate.

Meanwhile, the Morgan Stanley analysts say that it would be legally difficult to introduce mortgage portability, which would allow homeowners to keep their current rate when they move.

"We think it's extremely difficult to make that retroactive, but that could have some larger impacts, if that were to go through," said Bacow.

Meanwhile, analysts at asset management firm Janus Henderson also wrote that they expect Fannie and Freddie's bond market intervention to have only a modest impact on mortgage rates.

Nick Childs, head of structured and quantitative fixed income, and John Kerschner, global head of securitized products, said in a recent note that unlike the Fed, Fannie and Freddie don't simply buy and hold mortgage bonds, but rather use callable debt or derivatives to hedge their interest-rate risk.

Those hedges and funding instruments push the duration and optionality risk back into the market, effectively reshuffling who holds the interest-rate risk, but keeping most of it in the private market.