Mean Girls, Monetary Policy, And Mortgage Rates

Jerome Powell is living his own verison of Mean Girls.

Jerome Powell is living his own version of Mean Girls.

Every day he walks into Uncle Sam’s high school cafeteria, and every day the same table is screaming at him. Trump is scribbling insults in Sharpie like detention notes. “Get lost Jerome.” “Lower rates now.” “Nobody likes you.” Pulte is standing on the lunch table, yelling like Regina George in khakis and rich guy penny loafers. “Fire him, Donnie. Fire him.” And the rest of the crowd joins in, convinced Powell is the one who ruined prom.

But none of them actually understand how this works.

Your mortgage rate is not high because Jerome Powell raised the Fed Funds rate. It is high because nobody wants to own your mortgage. That’s the part they skip. That’s the line nobody’s written in the group chat. The bond market has no appetite for the loan behind your dream home. And until that changes, the rate stays where it is.

The Fed could cut short-term rates tomorrow. Powell could signal, hint, whisper, or shout. And you’d still open Zillow and see 6.7%. Because even if the Fed cuts, the long end may not follow. That part of the curve is watching something else entirely. It is watching deficits, watching spending, and watching the possibility of persistent inflation tied to structural debt addiction. The ten-year does not care about guidance. It cares about risk … and the bond vigilantes see risk everywhere. What sets your mortgage rate is not the speech Powell gives on a Wednesday afternoon. It is whether or not the market wants to hold the U.S. long bond & the thirty-year fixed-rate loan you are trying to lock in. Right now, it does not. Not even a little.

This isn’t high-concept monetary theory. It is basic plumbing. The loudest voices in the room are screaming about affordability without knowing how the system actually functions. Or maybe they know how it works and feel powerless to do anything.

The Truth About What Sets Your Rate

When you take out a mortgage, your lender doesn’t keep it. That loan is off their books before you’ve finished signing. It gets bundled together with thousands of others and packaged into a bond called a mortgage-backed security. That bond is then tossed into the open market, where investors like banks, funds, foreign buyers are supposed to buy it.

And in a functioning system, they do.

Most of these bonds are backed by loans guaranteed by Fannie Mae and Freddie Mac. That means the credit risk is minimal. Investors get a stream of interest payments, along with the comfort of an implicit government backstop. But even with all that, nobody wants the bond right now.

The real Mean Girls are not in the cafeteria anymore. They’re in the secondary bond market. And they are not interested in your mortgage. Not this year and not at this price. They’re ghosting the asset class entirely. And when the buyers disappear, the system stalls and that’s where the real story begins …

Before we talk about why that demand has dried up, let’s walk through how your mortgage rate is actually set. Because it’s not magic, it’s math.

First, there’s the 10-year Treasury yield. This is the starting point. It reflects the market’s best guess about future growth, inflation, and how much borrowing the government will need to do to keep the lights on. Powell and the FOMC influence it, but they don’t control it. And Pulte, deep down, has to know this despite his tirades. The 10-year doesn’t bend to tweets, it moves based on investors voting with billions of dollars worth of “this isn’t a good enough rate for the risk I’m taking”.

Source: Fannie Mae

Second, there’s the Primary/Secondary spread. This is the gap between what you pay and what the investor gets. It reflects the real-world costs of originating, underwriting, hedging, and servicing your loan. Lenders need margin. They need to cover operations. They need to stay in business. That spread protects them and helps them turn a profit to keep the machine going. Another logic based metric that is driven by somewhat rational incentives.

Source: Fannie Mae

Third, there’s the MBS spread. This is the difference between the yield on the mortgage bond and a comparable Treasury. Once your loan and thousands of others get bundled together in a bond, this spread exists because mortgages carry risks that Treasuries don’t. Prepayment risk. Liquidity risk. Some trace amount of credit risk. Investors need to be paid for those frictions. And lately, they have been demanding a lot more income relative to Treasuries for that.

Source: Fannie Mae

Put it all together and you start to understand why your mortgage rate is not just “what Powell says” or “what CNBC reports.” It is a blend of market expectations, lender realities, and investor appetite. And right now, that final layer, demand for the bond itself, is breaking the model. That’s what’s really causing high mortgage rates.

This is not about the Fed moving too slow. It’s about the buyers not showing up.
And until they do, mortgage rates are going to stay wide.

Source: Wolfstreet

The Buyers Are Gone Baby Gone

There are a few core players who traditionally buy mortgage bonds. The Federal Reserve. Commercial banks. Foreign central banks and sovereign funds. Large U.S. institutions like REITs, pensions, and insurance companies. That’s the ecosystem and right now, almost all of them are sitting on their hands for various reasons.

Start with the Fed. During the COVID era, they were the backstop. They were buying 30% to 40% of all new agency MBS issuance. Just like they did after the great financial crisis in 2009. They were the market. But since mid-2022, that support has been non existent, in fact they’ve been sellers during “Quantitative Tightening”. In fact, the Fed has shed more than $600 billion in MBS from its balance sheet, a drop of over 20%. This is not passive drift. It is structural withdrawal. The Fed is pulling back it’s balance sheet stripping the market of demand that keeps spreads in check and borrower rates lower.

Commercial banks followed the same path. At their peak in early 2022, U.S. banks held about $2.3 trillion in agency MBS. That number had grown from $1.8 trillion just two years earlier. But after SVB collapsed and duration risk became a balance sheet liability, banks changed course. Since then, they have offloaded more than $400 billion in mortgage bonds. That is a 35% drawdown from the top. None of these banks have the liquidity to plow money into low yielding government MBS.

These were are historically are the two biggest buyers. And both are gone, just like that which Pulte can’t do a thing about.

Foreign demand has faded too. In the early 2000s, non-U.S. investors held over a $1 trillion in government-backed and private-label mortgage bonds. Back then, everyone wanted in. Banks were leveraged 20x to 40x. Wall Street was printing toxic mezzanine debt like it was candy. Investor demand was so relentless that spreads stayed tight, even as origination volumes ran into the trillions. This was the boom that made the movie The Big Short famous, investor demand was insatiable for anything labeled “mortgage bond”. It was truly the stablecoin of it’s time.

So how would a creative type “fix” the demand side?

What Could Fix It (But Probably Won’t Happen)

Cutting short rates will not fix this problem. It might nudge the ten-year lower, but it might not. And even if it does, it will not repair the gap between Treasury yields and mortgage rates. Because this is not a front-end problem, this is a market structure problem. The mortgage machine is not waiting on Powell, it is waiting on a bid from MBS bond buyers and more liquidity in the system to be allocated to bonds.

If policymakers were serious about bringing mortgage rates down, they would stop yelling at the Fed Chair and start working to restore demand for mortgage-backed securities. That is the part nobody wants to say out loud, because it is hard. Because it is unpopular. Because it is not quick. But unless someone steps up to buy the bond behind the loan, nothing else matters. The rate stays stuck, the system stays frozen, and the Great American dream of buying a home stays out of reach for most.

There are ways to fix this. But none of them are easy, none of them are likely, and most of them aren’t feasible. And maybe that is why Pulte is screaming. Maybe that is why he keeps tweeting “Fire him” and blaming Powell for everything. Because the real fix is complicated, messy, and requires doing things that probably are not going to happen. But it is also worth remembering who he is. Pulte is not an outsider, he runs the FHFA. He is the one holding the policy keys. Blaming Powell for high mortgage rates while overseeing the very agencies that structure the secondary market is not just a misread, it’s a deflection. It looks like victimhood, but maybe it is something else. Maybe he understands just how broken the system is and how powerless he is.

One “not gonna happen” strategy would be for regulators to change the rules for banks to incentivize demand. They could reclassify agency MBS so that banks get full liquidity credit for holding it (make it a HQLA). Right now, Treasuries count. MBS do not. Reclassifying is a technical fix and it would work, maybe. Banks would want or need to buy more, but it would suck some air out of their Treasury bid.

Insurance companies could also be brought back into the market with more force with some incentive re-alignment. Their balance sheets are built for long-duration bonds, but capital rules make holding MBS expensive. Fix that, and you unlock billions in patient demand. But again, it requires coordinated regulatory action, and nothing in this environment moves that cleanly and I’m oversimplfying the mechanics of getting regulatory bodies and agencies to coordinate and move fast. Much easier to fire off tweets.

Fannie and Freddie, Pulte’s own outfit, could be given room to hold more MBS. The authority exists in theory and the FHFA could make the call. But politically, it would be a nuclear bomb. Expanding the footprint of the GSEs right now is the third rail, nobody wants to touch it. Especially with the privitazation debate being front and center. In 2003 and 2004 they owned close to $2 trillion, but the great financial crisis and their implosion made it clear they weren’t such good risk managers so this source of demand went away for good.

The Federal Home Loan Banks (a liquidity providing bank led by the FHFA) could tilt their collateral framework to spur demand also. They could reward banks that pledge MBS by giving better terms on their advance rates, but again, that would take leadership and coordination. And it would also incentivize banks to lever and risk seek even more, and the admin is too busy allowing crypto companies inside the pearly bank gates to care about mortgage spreads.

The Fed could also quietly launch a temporary mortgage repo window. Not Quantitative Easing (the buying of MBS), but just a facility that tells banks, we will backstop you if you need to fund this risk. It would have to be temporary, like the BTFP that bailed out underwater MBS, but it would work at least in theory. The problem here again is that it would boost bank profits and incentivize them to take more risks. Even the ones that aren’t great at managing risk.

You could also relax mark-to-market accoutning rules. Early or late 90’s bank GAAP accounting rules dictated that Accumulated Other Comprehensive Income (AOCI) had to be counted on the balance sheet despite other loans and liabilities not getting the treatement. So one could in theory let banks and insurers treat some agency MBS as held to maturity. That would reduce capital swings and allow for more leverage, but functionally it will hide and incentivize risk taking. Which if SIVB showed us, is not something the bank system needs more of.

Tax changes could work too. Make MBS interest income tax-exempt, and you would see demand spike overnight massively. The yield would be too attractive to ignore. And being ever more creative, you could create a retail wrapper spurring mom & pop demand. An IRA-qualified MBS ETF … or a Patriotic Housing Bond could be created that’s safe tax free income backed by American mortgages, but that takes legislation. It would also leave a large hole in tax revenues on the trillions of interest that is currently taxable.

So yes, these are good ideas. And yes, they would help. But they are long shots.

The Real Fix Is Too Painful

The real fix, the one that would actually work is the most painful. And I don’t want this to happen but we need to understand the reality of our situation.

One way to bring rates much lower and turn Quantitative Easing back on and spur bank demand would be to crash the economy. That is not something I’m advocating, but that is about the only thing that does it all. The Fed could fast forward the pain by puking MBS even faster than they are now. Widening spreads further. Causing more volatility. Spurring stock market draw downs. A “controlled” demolition of economic conditions that would freak everyone out, drain our 401ks, nuke crytpo market cap, and then yes, send 10 year yields screeching lower. In this world, the Fed with air cover could kick start Quantitative Easing again, buy those bonds, and everyone could have a 3.5% mortgage again.

Scary to think about? Yes. But this is how it all works.

And that is probably why everyone keeps yelling at Powell. It is easier to chant “Just cut rates” than it is to say, “Incentivize demand” or shock the system. It is easier to fire off blame than it is to admit that the real problem is nobody wants the bond. And until they do, nothing changes.

You want lower mortgage rates?

It’s tempting to act like you are powerless, to point at Powell, to write the tweet, to play the part. But victimhood is not a strategy and especially not when you control levers that can move markets. The people locked out of homeownership are not helpless. They are watching, and they deserve more than theater and name calling. They deserve someone who takes the blame and turns it into a blueprint.

Remember the entire financial system isis not one lever, it’s not one speech, it's not one chart. It’s a butterfly effect of liquidity and structure and risk appetite, flapping its wings through eight layers of fragile incentives. You can cut the front end. That does not mean the ten-year drops. And even if it does, that does not mean spreads tighten. And even if they do, that does not mean your lender stops padding the margin.

This is the part where most people throw up their hands and start tweeting in all caps. But if you actually want to fix it, you cannot act like a victim in a system you help run. You do not get to hold the steering wheel and yell at the road. Blaming the Fed is easy. Crashing the economy would be insane, but it feels like the only thing that would get long rates down, demand for MBS up, and lower mortgage rates for us all.

And structurally, that is the legacy of Quantitative Easing. For over a decade, QE created an environment where only two players mattered, the Fed and the banks. Everyone else was crowded out. Foreign buyers pulled back. Insurers and pensions could not compete with a central bank willing to buy everything at any price. The result is a mortgage market where there is no natural buyer left. Just an empty space where demand used to be and a market addicted to Fed intervention.

The American Dream Didn’t Die. It Got Priced Out.

This was never the intention.

Quantitative easing was built as a circuit breaker. A temporary stabilizer and definitely ot a structural addiction. But stretch an academic theory over a decade, inject $9 trillion into the system, and you don’t just fix liquidity. You rewire the demand curve. You teach an entire market to function only when the central bank stands in the middle of it. You replace risk appetite with policy dependence. And the only buyers left are banks and the Fed, both of which only show up with a backstop.

This is the legacy and the painful truth. Between 2009 and 2021, the top 10% of U.S. households captured nearly 70% of all wealth gains. That wasn’t a bug. That was the feature. The capital flowed to asset holders. The system bent toward those with balance sheets and financial assets. Yellen won’t touch this. Powell won’t touch this. None of the ultra wealthy will touch it. Because they know not to bite the hand that feeds them.

But while we wait for someone to fix it, something deeper is being lost. Not just spreads. Not just price discovery, but belief. The American Dream is bleeding out on the sidewalk for far too many young people.

You were told how this works … do the work … save the money … buy the house. But now the system doesn’t clear. Rates are too high and housing is unaffordable for far too many young people. And that’s not because short rates are too low. It’s because America is borrowing too much money. We’re running debt fueled deficits. And this is causing long rates to stay stubbornly high as people are right to question “if we’re good for it”. And add on top of it the fact that there’s no bid for the bond behind your mortgage. The whole machine only works with demand and right now, that demand isn’t there.

Young people are stuck, not because they’re lazy. Not because they’re skipping homeownership. Because they’ve been priced out of it. They’re trapped in leases they don’t want, carrying student debt they can’t shed, watching 6.7% mortgage quotes lock them out of the game they were told to play.

And still the shouting continues on social media. Some think it’s fun to be the Mean Girl. The fingers point. Powell is blamed like he’s the prom chaperone who killed the vibe. But the Fed is not a government agency, it’s not there to do what the President or the head of the FHFA wants. It’s a consortium of private banks, built to insulate the system from political capture. A firewall. A stabilizer. A way to prevent the U.S. from becoming a monetary banana republic.

All of the fixes are hard, some might say impossible, but we pay our public servants to find solutions not post on X. I wish more of them would remember that. Because the people locked out of home ownership right now can’t just harass their banks or harass their lenders into giving them a better rate. They’re told “to work harder” or to “work smarter” or to “find a way”.

But maybe it’s time that message worked both ways.

Maybe it’s time the people with real power, at the FHFA, in Congress, inside Treasury, started working smarter too. Maybe they stop posting and start solving. Because yelling at Jerome Powell doesn’t lower a mortgage quote. And playing prom politics doesn’t rebuild the bid in the bond market.

This isn’t a vibe problem. It’s a structural one. You can’t fix it with tweets. You fix it by engineering demand. You fix it by facing the cost of long-term dependency and telling the truth about what we broke.

We trained a generation of government servants and policymakers to expect the Fed to clean it up. But the Fed isn’t supposed to run the housing market. The Fed isn’t supposed to be the mortgage buyer of last resort. And it sure as hell isn’t supposed to be the one held responsible when the entire plumbing system stops clearing.

You want to lower mortgage rates?

Stop blaming Jerome. Start fixing the system. And for the love of God, get to work now. Because the dream isn’t dead yet. But we are running out of time.

Until next time,
Victaurs