That looming 7% mortgage rate…

By Wolf Richter for WOLF STREET.

The average 30-year fixed mortgage rate rose to 6.71%, the highest since July last year, according to Freddie Mac’s weekly measure today for the week through Wednesday September 2.

It has been in this 6.0% to 7.0% range since September 2022, except for a few spikes to the upside.

These 6-7% mortgage rates are not high historically. They’re just high compared to the 14 years of financial repression between 2008 and 2022, when the Fed cut its short-term interest rates to near zero and pushed down mortgage rates with trillions of dollars of purchases (funded by “money printing”) of mortgage-backed securities (MBS) and Treasury securities.

The 30-year fixed mortgage rate tracks the 10-year Treasury yield but is higher. On average, a 30-year mortgage gets paid off in about 12 years as homes are sold or refinanced. The amount by which it is higher – the spread – varies.

That spread had widened in 2022 and 2023 to more than 3 percentage points, the most since the early 1980s, meaning that mortgage rates were relatively higher compared to 10-year Treasury yields. Then the spread began to narrow again and by the end of 2025 was down to 2 percentage points.

To narrow the spread further and bring down mortgage rates, Fannie Mae and Freddie Mac – under government conservatorship – announced with great fanfare on January 8, 2026, that they would substantially accelerate the buybacks of MBS that they’d previously issued.

To fund these buybacks, they use operating cash flow that they would have used to buy Treasuries, and they shed Treasury securities already on their balance sheet. They’re thereby replacing Treasuries with their own MBS.

These buybacks have turned Fannie and Freddie, two big buyers and holders of Treasuries, into shedders of Treasuries, thereby helping push up Treasury yields. So a narrower spread from higher Treasury yields.

The 10-year Treasury yield, after rising earlier this week dipped today to 4.77%, in the upper part of the 4-5% range that has prevailed since mid-2023.

Before the Fed’s financial repression started in 2008, that 4-5% range was considered at the low end of the prior four-decade spectrum.

But note the spread: The 10-year Treasury yield is essentially unchanged compared to October 2023. But the 30-year fixed mortgage rates have dropped by a full percentage point over the same period, and the spread between the two has narrowed by a full percentage point.

The spread.

The weekly average of 30-year mortgage rate through Wednesday was 6.71% (Freddie Mac’s measure today). The weekly average 10-year Treasury yield as of Wednesday was 4.74%. So the spread between the two as of Wednesday was 1.97 percentage points.

This was just about exactly where the spread was at the end of December 2025 and at the beginning of January 2026, before Fannie and Freddie – and Trump – announced the big kahuna of MBS buybacks.

But all of them were 1 percentage point narrower than in mid- to late 2023, when the spread was around 3 percentage points for some periods.

A lot of factors move the spread, including:

• Buyers and sellers in the huge $12-trillion market for MBS, the second-largest bond market behind the Treasury market.
• The Fed contributes to a wider spread by shedding MBS. Under QT, the spread had widened in late 2022 and through 2023 to about 3 percentage points. While QT ended in December 2025, the runoff of MBS has continued.
• Fannie and Freddie contribute to a narrower spread by buying back their own MBS since late 2025.

The average 30-year fixed mortgage rate was 6.21% before Fannie and Freddie – and Trump – announced the increase of the buyback program on January 8. By the end of February, mortgage rates had dropped to 6.01%. But then they began rising again, as the 10-year yield had begun to surge. And now mortgage rates are at 6.71%, highest in over a year, and the spread has been stuck at about 2 percentage points, despite the buybacks. But where would mortgage rates be without the buybacks? Over 7%?

The Fed’s impact on the spread: During QE, the Fed bought MBS to narrow the spread between Treasury yields and mortgage rates, and also to push down long-term yields in general, and thereby repress mortgage rates in two ways, and the spread narrowed to less than 1.5 percentage points, and as Treasury yields also fell, mortgage rates fell below 3%, even as inflation surged toward 9%.

That was the Fed’s financial repression which resulted in the worst inflation in 40 years and the biggest home price explosion ever, which caused the current “affordability crisis,” as it’s called.

But QE ended in early 2022, and QT started in the second half of 2022, when the Fed started shedding MBS, and it continues to shed MBS at a rate of about $15-18 billion per month (determined by the passthrough principal payments that MBS holders receive when the underlying mortgages are paid off or are paid down via monthly principal payments). After QT ended last December, the Fed purchased T-bills to replace the MBS runoff.

So far, the Fed has shed $827 billion, or 30%, of its MBS that it had acquired during QE, including $190 billion over the past 12 months and $17 billion over the past four weeks.

The end of QE in early 2022, starting with the expectation of the end of QE beforehand, and then QT and shedding MBS were big factors in the widening of the spread at the time. And then the slow-down of QT in 2024 and the end of QT in 2025 took a lot of pressure off the spread, and it narrowed by 1 percentage point through the end of 2025. But the MBS runoff continues to pressure the spread.

That looming 7% mortgage rate…

At 6.71%, mortgage rates are not far from that 7% line that they’d already breached in 2023 when the spread was 3 percentage points. It seems the Fannie and Freddie buybacks counteract the Fed’s MBS runoff in terms of the spread, though they may push up Treasury yields by pulling Fannie and Freddie out of the Treasury market.

The buybacks may be the only thing that keeps mortgage rates below 7% by keeping the spread close to 2 percentage points, rather than letting it drift wider.

In this scenario, the 30-year fixed mortgage rates would breach 7% when the 10-year Treasury yields goes over 5%, and stays over 5% — rather than just kiss 5% on the cheek and back off, as it had done spectacularly in October 2023.

 

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