Here's the problem with trying to make housing more affordable by pumping money into the mortgage market: when you have too few homes and too many buyers with cheaper credit, prices go up. That's the warning from Moody's Chief Economist Mark Zandi about President Donald Trump's new directive ordering Fannie Mae (FNMA) and Freddie Mac (FMCC) to purchase $200 billion in mortgage bonds.

The Affordability Paradox

Trump's executive order promises to restore "affordability" and bring back the "American Dream" by lowering monthly payments. And yes, mortgage rates did drop 10-20 basis points to just over 6% after the announcement. Sounds good, right?

Not so fast, says Zandi. The lower rates might make monthly payments smaller on paper, but there's a catch. The real issue is what economists politely call a "severe housing shortage." When you inject stimulus into a market that doesn't have enough homes to go around, you're essentially giving everyone more buying power to compete for the same limited inventory. That means prices rise, potentially wiping out whatever savings you got from the lower interest rate.

In Zandi's assessment, the move will do "little to make homebuying more affordable" because the benefit of slightly lower rates gets canceled out by higher home prices. It's basic supply and demand, except with hundreds of billions of dollars thrown into the mix.

Who's Actually Running Monetary Policy?

Beyond the market mechanics, Zandi identifies what he considers an even bigger problem: institutional chaos at the highest levels of economic policymaking.

The Federal Reserve, which normally controls this sort of thing, has been letting its holdings of mortgage-backed securities mature and prepay. Even though the central bank pivoted back to quantitative easing in December, it's still allowing its MBS portfolio to shrink. Now Trump is ordering the Government Sponsored Enterprises to aggressively buy those same bonds.

This creates a fundamental conflict. Zandi describes the directive as a "backdoor way" for the White House to "circumvent the Federal Reserve." In other words, while the Fed tries to manage the money supply one way, the administration is effectively pulling it in the opposite direction through Fannie and Freddie.

"Who is in charge of setting monetary policy?" Zandi asked, highlighting what he views as executive overreach that's "even more worrisome" than whether home prices go up or down.

Echoes of 2008

Trump celebrated his decision not to sell Fannie Mae and Freddie Mac during his first term as a "truly great decision" that built up an "absolute fortune" in cash. But Zandi sees the re-expansion of their balance sheets as a step backward toward dangerous territory.

After the 2008 financial collapse, regulators placed strict constraints on these agencies to prevent them from becoming overleveraged again. Zandi warns those "principal constraints" are now "eroding." By uncapping their portfolios, the administration risks returning to the pre-crisis model where Fannie and Freddie operated like "huge hedge funds," a setup that went "badly awry" during the Global Financial Crisis.

Market Snapshot

Markets are pricing in a 95% probability that the Federal Reserve will hold interest rates unchanged in January, according to CME Group's FedWatch tool.

On Monday, the SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust ETF (QQQ), which track the S&P 500 and Nasdaq 100 respectively, both closed higher. The SPY gained 0.16% to $695.16, while the QQQ advanced 0.083% to $627.17.

Futures for the S&P 500, Nasdaq 100, and Dow Jones indices were trading lower on Tuesday.