Federal Reserve's $2.1 Trillion Mortgage Portfolio Under Scrutiny Amid Persistent Housing Affordability Challenges

Economist Eric Basmajian recently ignited discussion on social media, questioning the Federal Reserve's continued holding of mortgage-backed securities (MBS) in light of ongoing housing affordability issues. In a tweet, Basmajian asked, > "With housing affordability a primary issue, should the Fed be holding mortgage-backed securities?" The query highlights a growing debate regarding the central bank's balance sheet policies and their broader economic implications, particularly for the housing market.

The Federal Reserve currently holds approximately $2.138 trillion in mortgage-backed securities as of early July 2025. These substantial holdings are a legacy of quantitative easing programs initiated during the 2008 Global Financial Crisis and expanded during the COVID-19 pandemic. The central bank's aim with these purchases was to provide market stability and foster accommodative financial conditions, which contributed to historically low mortgage rates.

Despite the Fed's ongoing quantitative tightening efforts, the reduction of its MBS portfolio has been notably slow. While the Fed has set a monthly redemption cap of $35 billion, actual paydowns have been closer to $15 billion per month. This slow pace is largely attributed to the "lock-in effect," where homeowners with low-interest mortgages are disincentivized from refinancing or selling their homes due to significantly higher current mortgage rates.

The slow runoff has prompted some Federal Reserve officials, including Governors Michelle Bowman and Christopher Waller, to express a desire to return to a balance sheet composed primarily of Treasury securities. Research from the Fed indicates that even with current runoff rates, the central bank could still hold hundreds of billions in MBS a decade from now. This persistent presence in the MBS market fuels the discussion, as seen in Basmajian's tweet, about its potential influence on housing market dynamics and affordability.

The question of whether the Fed should actively sell its MBS holdings to accelerate the balance sheet reduction remains a point of contention among economists and policymakers. While such a move could potentially put downward pressure on housing prices, the Fed has yet to indicate consideration of active sales. The ongoing debate underscores the complex interplay between monetary policy, financial markets, and the everyday economic realities faced by consumers, particularly in the housing sector.