Our U.S. mortgage market would be unstable from one day to the next. Foreign holders, particularly China and Japan, are considering dumping mortgage-backed securities (MBS) in reaction to new U.S. trade policies. Eric Hagen, mortgage and specialty finance analyst at BTIG, cautioned that such measures might spook the market further. This is particularly troubling as mortgage rates are increasing. The dynamic today is that investors are anything but cautiously scooping up U.S. Treasury bonds. Such a quick sell-off might increase concern around the safety of this sector of mortgages.
At the end of 2005, foreign governments owned an astounding $1.32 trillion in U.S. Wall Street’s mortgage-backed securities (MBS). That was worth 15% of the entire outstanding MBS. In the last year, China has begun to reduce its MBS portfolio. By the end of September, it was down 8.7% from last year. Japan and China each own about four hundred billion dollars in U.S. mortgage-backed securities. With such an enormous investment comes the question of how those funds will be used to shape our housing market.
Recent history shows that mortgage rates are spiking as well, led by in part the yield on the 10-year Treasury bond. The U.S. Federal Reserve is currently in a vigorous process of balance sheet contraction. As it lets mortgage-backed securities roll off of its portfolio, the nature of the mortgage market may change dramatically. Hagen noted the potential friction caused by foreign selling, stating, “The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction.”
The ramifications of these changes go well beyond the mortgage market. A new survey from Redfin finds that one-in-five home buyers are cashing in stocks to make their down payments. This trend underscores the anxiety and financial burden Americans feel in today’s economic landscape.
Hagen expressed apprehension about how foreign actions might influence domestic rates: “Most investors are concerned that mortgage spreads would widen in response to either China, Japan or Canada coming in with a retaliatory objective.” This sentiment is echoed by Guy Cecala, executive chair of Inside Mortgage Finance, who commented on the strategic importance of housing markets: “They’re going to look at pushing levers and trying to put pressure… Targeting housing and mortgage rates is a powerful driver of something like that.”
As investors lept eagerly into this emerging market, the fate of the U.S. housing market lies precariously in balance. Record high mortgage rates are squeezing homebuyers more than ever. Even worse, possible foreign divestment puts more pressure on investors.