U.S. looks to reluctant foreign investors to help fund the housing market

As the U.S. housing market boomed in the past decade and fueled a bull market in mortgage investments, Norway's government-owned fund went along for the ride -- and the fall.

After that fund recorded its worst-ever year in 2008, managers cited investments backed by U.S. mortgages as a key culprit and began to cut back.

Now, U.S. officials are looking to foreign government funds again. The Federal Reserve is scheduled at the end of March to halt its purchases of mortgage-backed securities, a move that could drive up the low interest rates that have helped the housing market show new signs of life. The Fed is gambling that private investors will step in to buy the securities, helping to keep rates from spiking. Senior officials in the Obama administration and at the Fed say they are counting in part on foreigners to keep the housing market funded.

But financial analysts and advisers familiar with foreign government funds, known as sovereign wealth funds, predicted that the United States will get limited relief from abroad.

"I don't think it will be enough to fill the hole," said Ajay Rajadhyaksha, head of fixed-income strategy for the United States at Barclays Capital.

Nor is Norway's experience encouraging. Its government's holdings of securities issued by the mortgage financier Fannie Mae declined from a 2007 high of more than $15 billion, at current exchange rates, to just more than $5 billion as of Sept. 30, 2009, according to the fund's public reports. Contracts with external investment mangers were slashed, and the fund's guidelines were refocused toward individual stocks, real estate and other deals that the fund's staff had the expertise to vet.

Sovereign wealth funds are pools of money used by governments to make investments. The largest belong to big exporters such as China and the oil-rich monarchies of the Persian Gulf that accumulate trade surpluses.

These funds often set guidelines for the amount of money they are willing to put into bonds or other fixed-income investments, including mortgage-backed securities. Even if interest rates begin a modest rise, as he expects, Rajadhyaksha said he does not think it will be enough for sovereign wealth funds to direct large amounts of money away from alternatives, particularly U.S. Treasury notes, that are less risky and not associated with the mortgage crisis.

"A lot of sovereign wealth funds have a vested interest in seeing the U.S. stabilize," said R.P. Eddy, whose Ergo consulting firm advises foreign funds on U.S. and global economic issues. "But some wealth fund coming in to save the day? That is not going to happen."

The securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac are not debts of the U.S. government but do carry an implicit guarantee that the companies will not default. In December, the government carried that a step further, saying it would not limit the amount of money made available to keep the firms solvent.

Senior U.S. officials said the goal was to reassure buyers of the companies' mortgage securities that they were safe. "That's particularly true for foreign investors," said Eric S. Rosengren, president of the Federal Reserve Bank of Boston.

The Fed's departure from the market for mortgage-backed securities is only one step being taken to wind down the emergency measures put in place by the U.S. government during the financial crisis. But it is one that could have a direct effect on homeowners and potential buyers and on the tentative recovery in the real estate market.