According to Ginnie Mae’s latest report, foreign nations hold about $1.32 trillion in U.S. mortgage-backed securities (MBS). This figure is over 15% of all MBS outstanding. Japan and China in particular loom large as foreign players go. Each now holds about a quarter of a trillion dollars’ worth of U.S. mortgage-backed securities. Given the scope of this ownership, it is difficult to overstate the threat to the stability of the U.S. housing market. That’s particularly true as foreign investors begin to re-allocate their portfolios.
As for China, they’ve clearly begun the process of selling their U.S. mortgage-backed securities. By the end of September, their holdings were down 8.7% from last year at this point in time. The situation is compounded by the U.S. Federal Reserve’s ongoing strategy to reduce its balance sheet by allowing its MBS to roll off its portfolio. Foreign sales and domestic policy are putting double market forces of pressure. This may cause mortgage spreads to widen and mortgage rates, which are tied to the yield on the 10-year Treasury, to rise.
In fact, in the last week financial analysts have been raising warnings over what could happen if foreigners keep selling U.S. MBS. Eric Hagen, a mortgage and specialty finance analyst at BTIG, laid those concerns out starkly. He stated,
“The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction.”
There are a lot of nervous investors out there at the prospect of ramped up dumping by foreign nations. They are concerned this would further destabilize an already challenged mortgage market. Guy Cecala, the executive chair of Inside Mortgage Finance made a major observation about these changes. He argued that these overseas moves might force the U.S. government to respond.
“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.”
The top owners of U.S. MBS now include Japan, China, Taiwan, and Canada, reflecting a diverse array of international stakeholders in the American housing market. As these countries revisit their investments, the effects on U.S. mortgage rates can be significant.
A new survey released by Redfin shows that buyers will do just about anything to win in this market—no, really. One in five are now cashing out stocks to help afford their down payments. This worrying trend illustrates the increasing burden being placed on homebuyers in an unpredictable and volatile market.
Hagen shared his concern about the ambiguity of foreign entities’ selling purposes by saying,
“The lack of visibility for how much they could sell and their appetite for selling, I think that would scare investors.”
Foreign investment in U.S. mortgage-backed securities (MBS), domestic monetary policy, and buyer behavior are all tightly interwoven. This joint conditioning makes for a very difficult and volatile market landscape especially for housing. As international stakeholders remain on the fence with their investments, this can create a huge risk for sudden, dramatic changes in mortgage rates.
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