By Kim Jae-kyoung
Staff Reporter
Heavy investment by the Bank of Korea (BOK) in two U.S.-based mortgage giants ― Fannie Mae and Freddie Mac ― is unlikely to cause a liquidity problem, according to a U.S. mortgage expert.
In an email interview with The Korea Times, Stijn Van Nieuwerburgh, a finance professor at the Stern School of Business at New York University, said that chances are very slim that such bonds will become illiquid even in the case of their bankruptcy.
Regarding a question on the possible liquidity problem of Fannie and Freddie bonds held by the BOK, he said, ``It seems unlikely that Freddie and Fannie bonds would default. In the event of a bankruptcy, the U.S. government would take over these two mortgage state-sponsored enterprises (GSEs) and honor their debt.
``The debt would become U.S. Treasury debt all but in name. In fact, increased interest rates on U.S. Treasuries reflect this possibility already,'' he added. ``The U.S. residential mortgage-backed securities market is simply too important a financial market to let die.''
He explained that it took 25 years to bring this market to maturity and it has served to extend mortgages to U.S. households very well.
There has been growing concern here that if the two U.S. mortgage giants go belly-up, it will incur huge losses for the BOK, which has invested an estimated $40 billion of its total foreign reserves in the bonds.
The Times, a British daily, reported Monday that a large part of Korea's foreign reserves invested in U.S.-based mortgage-related bonds could turn out to be illiquid depending on how the Fannie and Freddie situation develops.
Nieuwerburgh, whose expertise lies in household finance and mortgages, also said that the market for MBS (mortgage-backed securities) is a very liquid one.
``The annual volume in MBS markets was more than $60 trillion in both 2006 and 2007,'' he said. ``So even with a reduction in liquidity, this remains a very liquid market by all standards.''
Concerns about the central bank's investment in the two crippled mortgage giants are growing as the nation's foreign reserves have been dwindling amid the won's steep loss against the dollar.
Nieuwerburgh, who visited Korea during May to attend an international conference hosted by the BOK, received his MA, MSc and Ph.D. from Stanford University.