Why Mortgage Rates Have Not Followed the Fed Lower

The short version: the federal funds rate is an overnight bank funding rate. A 30-year fixed mortgage is a long-duration, prepayable, securitized consumer credit instrument. The first rate can fall while the second stays sticky if long Treasury yields, MBS spreads, volatility, servicing economics, guarantee fees, and lender margins do not move with it.

That is what has happened. The Fed lowered the policy rate by 75 basis points in the second half of 2025, then held the target range at 3.50% to 3.75% at the March 17-18, 2026 FOMC meeting. Freddie Mac’s 30-year fixed-rate mortgage average was still 6.23% for the week ending April 23, 2026. The 10-year Treasury yield, the cleaner anchor for 30-year mortgage pricing than the fed funds rate, was around 4.26% on April 14, 2026.

Mortgage rates have moved down from their 2023 peaks, but not in lockstep with the Fed. The gap is the mortgage market telling buyers that the price of long-term, refinanceable credit is still high.

Policy rate versus mortgage pricing anchorsPercent. Fed funds shown as the 3.50%-3.75% target midpoint.

The mortgage rate is priced off long-duration bond math, not directly off the overnight policy rate. Sources: Federal Reserve, FRED, Freddie Mac.

The Fed Does Not Set the 30-Year Mortgage Rate

The Fed sets a target range for overnight federal funds, and that rate directly affects short-term money-market instruments, bank funding costs, floating-rate debt, and adjustable-rate products. Fixed-rate mortgages are different. The lender is giving the borrower a long-term fixed coupon, while the borrower keeps a valuable option: if rates fall, the borrower can refinance; if rates rise, the borrower can keep the loan.

That borrower option makes a mortgage bond harder to own than a Treasury. When rates fall, the investor may get prepaid and must reinvest at lower yields. When rates rise, the borrower does not refinance, so the investor is stuck holding a longer-duration asset at a below-market coupon. Investors demand extra yield for that asymmetry.

For a lender, the retail mortgage rate must cover:

The long-term risk-free rate, usually proxied by the 10-year Treasury or by the relevant swap curve.
The MBS spread over Treasuries or swaps.
The agency guarantee fee paid to Fannie Mae, Freddie Mac, or Ginnie Mae economics embedded in the security.
Servicing value and servicing risk.
Origination cost, hedging cost, warehouse funding, required return on capital, and profit margin.
Borrower-level adjustments for credit score, loan-to-value ratio, occupancy, property type, loan size, points, and product structure.

So when the Fed cuts, the first question is not “How much did fed funds fall?” It is “Did the long end of the curve and agency MBS spreads fall enough to reprice mortgage production?”

Why the Pass-Through Has Been Limited

The first reason is that long rates did not fall one-for-one with short rates. Mortgage investors price against expected inflation, expected future Fed policy, term premium, fiscal supply, global demand for duration, and volatility. A lower overnight rate does not automatically mean a much lower 10-year yield.

The March 2026 FOMC minutes show why. Policymakers held the target range at 3.50% to 3.75%, emphasized elevated uncertainty, and noted inflation remained somewhat elevated. The minutes also described market expectations shifting toward later easing as inflation and geopolitical risks rose. That backdrop holds up the long end of the yield curve.

The second reason is mortgage convexity. Mortgages are not plain bonds. When rate volatility rises, the refinance option embedded in a mortgage becomes more expensive to investors. MBS buyers then require a wider spread to compensate. That wider spread shows up as a higher mortgage rate for the borrower.

The third reason is that the largest post-crisis marginal buyer is no longer adding MBS. The Federal Reserve still holds a very large agency MBS portfolio, but it is not the incremental bid it was during quantitative easing. As of April 22, 2026, the Fed reported about $1.993 trillion of mortgage-backed securities held outright, down roughly $192 billion from a year earlier. Even slow runoff matters because private investors must absorb more duration and prepayment risk at market-clearing spreads.

The fourth reason is mortgage origination capacity and lender margin. Retail mortgage pricing includes secondary-market execution, but it is not only secondary-market execution. Lenders also price for capacity, hedge performance, pull-through risk, repurchase risk, servicing released premiums, compliance cost, and desired volume. If lenders do not need to chase volume, or if hedging a pipeline is expensive, borrower rates can remain wide even if benchmark yields edge down.

Who Buys MBS

Most U.S. mortgages are not held by the original lender for 30 years. The lender originates the loan, sells it into the secondary market, and the loan is pooled into a mortgage-backed security. Fannie Mae says its single-family business provides mortgage-market liquidity primarily by acquiring loans from lenders and securitizing them into Fannie Mae MBS. Ginnie Mae securities provide a government guarantee of timely principal and interest for qualifying government-insured or guaranteed loan pools. Freddie Mac operates the same broad agency securitization channel for conventional conforming loans.

The buyers are yield investors with different funding models and risk appetites:

Banks and credit unions buy agency MBS for yield, liquidity, and regulatory capital treatment, though deposit costs and duration risk can limit demand.
Money market funds own short agency and GSE paper, not long mortgage pass-through risk in the same way, but they are part of the broader agency demand base.
Mutual funds and ETFs buy pass-throughs, specified pools, CMOs, and TBA exposure on behalf of retail and institutional investors.
Insurance companies and pension funds buy high-quality spread assets to match liabilities, though they are sensitive to duration and convexity.
Mortgage REITs buy levered agency MBS, funding positions in repo and earning spread income, which makes them sensitive to financing costs and volatility.
Foreign investors and reserve managers buy agency securities as high-quality dollar assets, but currency hedging cost can change their appetite.
Broker-dealers intermediate inventory and the TBA market, but they are not natural long-term holders at unlimited size.
The Federal Reserve remains a large holder, but current policy has shifted it away from being the dominant marginal buyer of new mortgage duration.

The Fed’s Financial Accounts show the breadth of the buyer base. In the 2025 Q3 Z.1 table for agency- and GSE-backed securities, U.S.-chartered depository institutions held about $2.85 trillion, the monetary authority about $1.81 trillion, the rest of the world about $1.39 trillion, money market funds about $999 billion, households and nonprofits about $939 billion, mutual funds about $777 billion, broker-dealers about $619 billion, state and local governments about $456 billion, and mortgage REITs about $239 billion.

Major holders of agency and GSE-backed securities2025 Q3 holdings, trillions of dollars.

Mortgage rates clear through a broad buyer base. When the Fed is not the marginal bid, private buyers set the spread. Source: Federal Reserve Z.1 L.211.

Those are not identical buyers with identical constraints. A mortgage rate is therefore not one policy-rate decision. It is the clearing price required to get this full buyer base to own long-duration, prepayable housing credit.

How a Mortgage Rate Is Set

A mortgage lender usually starts from a secondary-market execution. For conforming loans, that means the price at which the loan can be sold into an agency MBS execution, often through the TBA market. TBA means “to be announced”: buyers and sellers agree on agency, coupon, settlement month, and other standard terms before the exact pools are delivered.

The simplified chain looks like this:

The borrower applies for a loan.
The lender prices that loan against current MBS prices, Treasury/swap hedges, guarantee fees, servicing value, points, and borrower-level characteristics.
The loan is locked, and the lender hedges the pipeline because rates can move before closing.
After closing, the loan is sold, pooled, or retained.
If pooled, the MBS coupon must be attractive enough for investors after accounting for prepayment risk, duration, guarantee structure, liquidity, and relative value versus Treasuries, corporate bonds, and other spread products.

This is why two borrowers can see different rates on the same day. The headline Freddie Mac rate is an average from applications submitted through Freddie Mac’s Loan Product Advisor. It is useful as a market gauge, but actual pricing varies with credit profile, down payment, points, lender, property type, and timing.

Why Mortgage Rates Can Stay Near 6% Even After Fed Cuts

Mortgage rates can remain elevated if five conditions hold:

The 10-year Treasury yield stays above 4%.
Investors demand a historically wide mortgage spread because rate volatility and prepayment uncertainty remain high.
The Fed is not buying MBS and its portfolio is running down.
Deposit-rich banks are less aggressive buyers because their funding costs and unrealized securities losses changed the economics.
Lenders keep retail margins wider to compensate for lower volume, hedging cost, and operational risk.

That combination can easily leave a 30-year fixed mortgage rate in the low-to-mid 6% range even after fed funds has fallen. The borrower is not borrowing overnight from the Fed. The borrower is issuing a callable, amortizing, 30-year bond into a market that must be cleared by banks, funds, REITs, insurers, foreign investors, dealers, and the agencies.

What Would Pull Mortgage Rates Lower

The most direct path is lower long-term Treasury yields. That likely requires confidence that inflation is moving sustainably toward target, slower nominal growth, or a stronger market expectation of future policy easing.

The second path is tighter MBS spreads. That would require lower rate volatility, stronger private demand for agency MBS, cheaper hedging, more bank balance-sheet appetite, or a policy shift that makes the Fed or another official sector buyer more supportive.

The third path is narrower primary-secondary spreads. If lenders compete harder for volume, hedging conditions improve, or origination capacity becomes cheaper, more of the secondary-market improvement can pass through to borrowers.

Until those pieces move together, mortgage rates will not mechanically follow the fed funds rate lower. The Fed can lower the front end. Mortgage borrowers need the long end, the MBS basis, and the lender stack to cooperate.