Our main mortgage man, Zhou Xiaochuan

Why has HUD Secretary Alphonso Jackson been cozying up to Zhou Xiaochuan, the director of China's central bank?

Jackson would like China to keep pumping money into U.S. mortgage lending. Last year, China surpassed Japan as the Asian nation with the largest holdings of mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, having sunk $107.5 billion into such investments.

According to HUD, overseas investors held 9.7 percent of agency-backed MBS last year -- more than double the share held in 2002 -- with Asian nations accounting for 58.6 percent of foreign holdings (see chart). 

"It's not a matter whether (China is) going to do more business in mortgage-backed securities, it's who they're going to business with," Jackson told Bloomberg News' Josephine Lau on a trip to Beijing.

Wtih delinquencies and foreclosures up, ratings agencies have soured on some MBS backed by subprime loans, which could scare some foreign investors away from such investments.

Jackson was specifically touting the virtues of Ginnie Mae, since its investments are fully backed by the U.S. government. Fannie and Freddie's -- despite some perception to the contrary -- are not (as Bush administration officials have gone to some lengths to point out. See Inman News story).

China has $1.33 trillion in foreign-currency reserves, Bloomberg says, and its investments in MBS can keep borrowing costs down for American homebuyers. China also has an indirect effect on mortgage interest rates through its investments in U.S. Treasuries (which Bloomberg estimates totaled $414 billion as of April).

Some say the biggest threat to China's continued willingness to finance not only our mortgage lending but U.S. government debt may not be ups and downs of the housing market, but the continuing weakness in the U.S. dollar.

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