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Mortgage bonds start with mortgages: When a borrower takes out a 30-year, fixed-rate loan, the lender usually isn’t in it for the long haul. “We may have it, technically, on our balance sheet for a day or two,” said Chris Duncan, chief lending officer at La Salle State Bank in Illinois. Duncan said his bank usually doesn’t want to hold on to long-term mortgages, because they pay the bank a fixed interest rate for decades. That would be a bad investment if interest rates were to rise.
“If you make a terrible miscalculation, and you have too many loans at fixed interest rates, as rates continue to rise on your deposits, you’re paying out more money to your deposits than you are bringing into the bank in the form of loans and investment income,” Duncan said. So instead, La Salle State Bank, like most banks, sells off almost all of its long-term mortgages to the big, government-backed mortgage companies. “Our preference most of the time is going to be to sell those loans to Fannie Mae,” Duncan said.
Fannie Mae and Freddie Mac buy up truckloads of mortgages and package them into bonds, called mortgage-backed securities.
“And that mortgage-backed security is sold into the international capital markets,” said Nancy Wallace, a professor at University of California, Berkeley’s Haas School of Business. Wallace said investors love mortgage-backed securities because their steady stream of income from all of those mortgage payments is considered almost as safe as U.S. Treasurys. Mortgage-backed securities also tend to pay slightly more interest. “We have a huge international market that has a very high incentive to purchase mortgage bonds from the United States,” Wallace said.
The Trump administration is asking Fannie Mae and Freddie Mac to go back to doing something they did up until the financial crisis: buy the very bonds they’re selling. Wallace said there’d be more demand for mortgage-backed securities, so Fannie Mae and Freddie Mac would need even more mortgages to go into those securities. “As a bank, you can originate your mortgage, and expect to sell the mortgages that you originate at a reasonable price,” Wallace said. “And you’re going to be very willing to originate a lot of mortgages.” And, the theory goes, banks could originate them at lower interest rates.
“You are seeing more and more mortgage lenders offering rates below 6%,” said Mike Fratatoni, chief economist of the Mortgage Bankers Association. “That’s really something we haven’t seen very much at all since 2022. The Mortgage Bankers Association reports that applications to refinance mortgages jumped 40% in the last week. “When people hear about a rate being offered with something that starts with a 5, as opposed to a 6, that will really get someone’s attention,” Fratantoni said.
Fratantoni said we’ve seen a few refi boom-lettes like this over the past year, whenever rates have dipped. They tend not to last long because there are still plenty of pressures pushing long-term interest rates higher. Those include government debt, and President Trump’s attacks on Federal Reserve independence: If the president pressures the Fed
into pushing rates too low, inflation could pick up. “Investors are going to have to get compensated for that risk of higher inflation,” Fratantoni said. “They’re likely to push longer-term rates up.”
In other words, President Trump’s order might not be enough to move the needle for borrowers. Chris Duncan said at La Salle State Bank, mortgage rates haven’t really changed. “I think our 30-year’s only down an eighth from the start of this year,” Duncan said. “Our 15-year fixed rate hasn’t changed, and our 10-year is actually up an eighth since the president made that directive. Duncan said he thinks those will have to fall a lot farther before mortgage and refi applications really pick up. | 
