U.S. Urges China to Buy Mortgage Securities Amid Subprime Woes
bloomberg.com
July 13 (Bloomberg) -- The U.S. is urging China's central bank to buy more mortgage-backed securities after a surge in defaults by risky borrowers in the world's largest economy eroded demand for such instruments.
``It's not a matter whether they're going to do more business in mortgage-backed securities, it's who they're going to business with,'' U.S. Department of Housing and Urban Development Secretary Alphonso Jackson told reporters in Beijing. He met with central bank Governor Zhou Xiaochuan and Minister of Construction Wang Guangtao in the nation's capital this week.
The U.S. housing regulator is seeking to tap China's $1.33 trillion of foreign-currency reserves after surging defaults on subprime mortgages caused the near-collapse last month of two hedge funds run by Bear Stearns Cos. Almost $12 billion of U.S. mortgage securities have been downgraded by ratings companies.
Jackson is in Beijing to persuade the Chinese central bank to buy more mortgage securities from Ginnie Mae, a mortgage association under the Housing Department. Its securities are guaranteed by the U.S. Government National Mortgage Association.
Ginnie Mae is ``in a better position than most'' to offer mortgage products since, unlike Fannie Mae and Freddie Mac, it has the full backing of the U.S. government, said Jackson. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said. China held $414 billion in U.S. Treasuries as of April, according to data compiled by Bloomberg.
Commercial Banks
``China's bought some mortgage-backed securities from us, but not in great numbers,'' Jackson said, without providing target numbers for future purchases.
China held $107.5 billion in U.S. mortgage-backed securities as of June 2006, up from $3 billion three years earlier, according to HUD's Web site. The figures include securities offered by Ginnie Mae, Fannie Mae and Freddie Mac, without providing a more detailed breakdown of each agency's holdings.
HUD also plans to approach Chinese commercial banks such as China Construction Bank Corp. and ask them to buy mortgage securities, said Jackson.
The housing department wants to sign a memorandum of understanding with construction minister Wang when he visits the U.S. in August, Jackson said without elaborating. The two nations face similar challenges in providing affordable housing to average citizens, he said.
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