Seeing Housing and Urban Development Secretary Alphonso Jackson sitting next to Treasury Secretary Paulson at yesterday’s lender bailout summit jogged my memory of Jackson’s recent trip to China that, although covered in the traditional media, didn’t seem to garner the attention it deserved.
In early July, Jackson appeared in a very candid Bloomberg interview in Hong Kong as he was passing through on his way to meetings with Chinese People's Bank of China governor Zhou Xiaochuan, Construction Minister Wang Guangtao, and other Chinese officials.
In the interview, Jackson showed no hesitation when revealing that the purpose of his visit was to attempt to persuade China to participate in the “very lucrative” market of American mortgage backed securities.
Specifically citing both FHA and Ginnie Mae, Jackson’s intention was to lean heavily on the explicit federal guarantees that both of these programs provide when making his case to Chinese officials who, as he stated, had already showed some interest in the investment.
“The best argument that we can make is that they have the full faith and credit, and backing, of the US government. “
This was the precise message he pressed during the delivery of his speech as well stating “They are a sound, solid investment, a win/win situation for the investors and for the American people. These securities are attractive because they have no credit risk and are backed by the full faith and credit of the U.S. Government. Also, most Agency Mortgage-Backed Securities even have a higher yield than the Treasury Securities.”
The result of the meeting was a lengthy “Memorandum of Cooperation” that was signed on August 30 between the two governments that established many areas “of mutual interest”.
Given that the federal government now seems bent on dramatically expanding its role in the mortgage market, I thought it was important to recount the events surrounding the Jackson visit to China.
Keep in mind that all mortgage related programs and agencies of our government (Fannie Mae, Freddie Mac, Ginnie Mae, various FHA programs etc) require some form of private investment in order to function.
With a reeling and risk averse Wall Street now pulling back from mortgage securities, possibly even including government agency investment, China may inevitably pick up the demand for agency securities and even drive an expansion.
It seems to me that a more sensible approach, considering that compensation for failed government agency securities would be funded by the US taxpayer, would be to let the turmoil in the US housing markets play itself out before looking for additional fuel from foreign investors.
More private investment will likely equate to a broadening of these programs possibly putting them further in jeopardy of overreaching.
This would be especially risky considering the uncertain state of the housing markets at the moment.
