Archives this under unintended consequences of a global trade war.
When you start a trade war, or at least threaten one, unexpected things can happen.
We have already got the feeling that mortgage rates do not like the trade war because of all the uncertainty involved.
But there is another wrinkle that can also consider here, and it is the massive possessions of mortgage -supported securities (MBS) contained by foreign countries.
If they decide to sell as a result of tariffs imposed on them, mortgage rates could jump in the United States.
Foreign investors own a good part of our priority loan
First things first, let’s talk about why foreign investors keep our priority loans and how much they own.
In general, foreign countries in the United States invest in the perceived health and security of its assets (and debt).
Sure things did not go so well in 2008, but all in all, foreign investors have long invested in the agency’s priority -supported securities (MBS) because they are relatively secure, high -performance investment.
And they are pretty much guaranteed too.
The Agency MBS includes loans supported by Fannie Mae and Freddie Mac (Conforming Loans), which has an implicit state guarantee.
And government loans, such as FHA loans, VA loans and USDA loans, which have an explicit guarantee.
Per Ginnie Mae, who provides a guarantee of the government’s home loan, hit foreign holdings of the Agency MBS a highlight of approx. $ 1.2 trillion in June 2021, representing almost 13% of the market.
The biggest investors in our agency MBS are Japan, Taiwan and China, where Canada recently became the foreign proprietor in fourth place.
The so -called “Big 3” accounted for approx. 64% of the Agency MBS foreign holdings, with an additional 22% coming from the rest of the top 10.
In other words, foreign possessions are concentrated by the Agency MBS in only a few countries. And it just happens that we have beaten them with customs recently.
Could these countries sell their MBS holdings in response to customs?
There is now at least some concern that these countries could sell their MBS holdings in response to customs and wider trade war.
After all, if it could potentially hurt us in the process, it could be used as a kind of negotiating chip to avert the tariffs.
This scenario was brought up in a recent Big report, as noted by Inside Mortgage Finance this week.
Although it is all speculative, everything is possible and on the table at this time. China, Japan and Canada have been hit by duties. And Taiwan has been threatened with duties.
Japan called it “regrettable” that they were not excluded from steel and aluminum starfish, while China charged tariffs and Canada imposed countermeasures against the United States.
It has not wasted over in other areas, such as MBS Holdings, but given how much they own, there are fears that these countries could dump their investments in a lot.
If that were to happen, the market would apparently be flooded with MBS, which would increase supply and lower the price.
Increased supply of MBS would lead to higher mortgage rates
The best way to track mortgage rates is with MBS prices. As their prices rise, the mortgage rates fall. And vice versa.
Assuming these countries, or just one them, decided to sell a wealth of MBS, prices would come down.
After all, more supply leads than demand at lower prices.
How much they fall is another question, but it would put an increased pressure on priority rates.
Maybe the rates of the 30-year-old fixed ladder would another 0.25%, who really knows?
Ultimately, you need a buyer to enter and absorb the excess supply to avoid a greater price disorder.
Maybe it would be fat if things got really bad, provided this type of thing even happened.
In a way, it can lead to another round of quantitative easing (QE), where the fat was a buyer of MBS, which increased their price and lowered mortgage rates.
Of course, these countries probably do not want to sell their stocks on the cheap while damaging their own finances in the process.
They depend on the value of the US dollar to control their own currency and balance trade, so it would be counterproductive to do so.
In the end, it’s kind of a silly thought, but it illustrates how much uncertainty is on the market.
And why mortgage rates will find it difficult to move significantly lower, even if financial data justifies them until we get more clarity on the ongoing trade war.
Read on: Tariffs vs. Mortgages
Before creating this site, I worked as a banking director of a wholesale loan in Los Angeles. My practical experience in the early 2000s inspired me to start writing about mortgage loans 19 years ago to help potential (and existing) home buyers better navigate the home loan process. Follow me on x for hot take.
