The Path to Lower Mortgage Rates in 2025: Breaking Down the Myths

Everyone in the mortgage industry seems convinced that 7%+ rates are here to stay for 2025. Here’s why I think  they’ve got it wrong. 

1. Fear and Loathing in the Mortgage Bond Market 

The fixed-income market is pricing in worst-case scenarios driven by exaggerated fears of tariffs and mass  deportations stemming from Trump’s rhetoric. While this saber-rattling may seem inflationary, it’s a strategic move  to bolster leverage in negotiations with China, Mexico, and Canada. Trump’s consistent focus on reducing inflation  suggests these policies are more about positioning than long-term economic disruption. 

2. Historically Wide Spreads Between Treasuries and Mortgage Bonds 

   
   

The spread between the 10-year Treasury yield and the 30-year fixed mortgage rate currently exceeds 250 basis  points ... far above the historical average of 170 basis points. Treasuries, offering low-risk returns around 4.6%, pale  in comparison to the 7.2% yields on mortgage bonds, which carry credit and pre-payment risk. 

Investors have been cautious chasing the additional yield mortgage bonds offer due to rapid rate changes and lingering concerns over pre-payment risk. The previous administration’s use of Fannie/Freddie to advance broader  housing initiatives also raised fears about credit risks. However, as rates naturally subside and economic growth  policies are implemented, these concerns will diminish. Investors will be drawn to the higher yields of mortgage  bonds, narrowing spreads and pushing mortgage rates lower. 

3. Fears About the U.S. National Debt Are Overblown 

Concerns over the national debt have fueled rising yields for Treasuries and mortgage bonds, as investors fear the  Fed may "monetize" the debt by printing money. Such actions are highly inflationary, which erodes the value of  fixed-income investments and drives yields higher. 

I believe the Trump administration will aggressively pursue creative initiatives to address these fears, including: 

➖ Selling underutilized federal lands. 

➖ Privatizing or selling stakes in entities like Fannie Mae and Freddie Mac. 

➖ Leasing government-owned infrastructure to private operators. 

➖ Reducing expenses through initiatives like DOGE (streamlining government operations) and cutting ineffective  programs. 

These measures could ease concerns about the debt, restore investor confidence, and ultimately bring mortgage  bond yields and mortgage rates down.