As tensions between the U.S. and China rise again due to President Donald Trump’s sweeping tariffs, economic experts are raising an alarming possibility: that China could retaliate by dumping its U.S. mortgage-backed securities. Such a move might send shockwaves through America’s housing market, which many already believe is dangerously inflated and riddled with fraud. Could China really use our own financial system against us?
The Weapon Few Are Talking About
Most people have heard about foreign countries holding U.S. Treasury bonds. But what’s less known is that foreign nations also hold about 15% of all U.S. mortgage-backed securities, or MBS, which are bundles of home loans sold to investors. According to Ginnie Mae, foreign countries held $1.32 trillion of these securities at the end of January. China is one of the top holders, along with Japan, Taiwan, and Canada.
“If China wanted to hit us hard, they could unload Treasuries. Is that a threat? Sure it is,” said Guy Cecala, executive chair of Inside Mortgage Finance. But selling off MBS could be even more disruptive, especially during the critical spring housing market.
China has already begun pulling back. By December, its MBS holdings were down 20% from the year before. Japan followed suit. If China, Japan, and others sell aggressively, U.S. mortgage rates could rise sharply. This would make buying a home even more expensive for Americans and further damage a market already struggling with high prices and low consumer confidence.
Why This Threat Matters
Mortgage rates tend to follow the yield on the 10-year U.S. Treasury bond. When investors sell Treasuries or MBS in large numbers, yields rise—and so do mortgage rates. Higher mortgage rates mean fewer people can afford homes, which could lead to falling home prices and a slowdown in construction and home sales.
Eric Hagen, a mortgage market analyst at BTIG, said that selling MBS could create panic. “The lack of visibility for how much they could sell and their appetite for selling, I think that would scare investors,” he said. Investors worry that spreads—the difference between mortgage rates and Treasury yields—could widen. That would make borrowing even more expensive.
To make matters worse, the Federal Reserve is no longer buying MBS as it did during the pandemic. Instead, it’s letting them roll off its balance sheet to shrink its financial footprint. Without the Fed stepping in as a buyer, the market would have one less safety net.
A Bubble Waiting to Burst
Experts argue that the U.S. housing market is already in dangerous territory. Prices are inflated due to years of government-backed loans, cheap money, and financial engineering. The housing market has become less about shelter and more about profit.
A recent study by the Federal Reserve Bank of Philadelphia found that a large portion of mortgage loans involve occupancy fraud. This happens when investors lie about living in the homes they buy to get better loan terms, putting banks and investors at higher risk. The report found that one-third of effective investors were committing this type of fraud. These risky loans are bundled into MBS and sold as if they are safe investments.
Widespread fraud has weakened the foundation of the housing finance system, similar to what happened before the 2008 financial crisis. Commercial real estate is also showing signs of fraud. Banks are now being asked to verify whether borrowers actually have enough money to repay loans—something they should have been doing all along.
Could It Actually Work?
If China did sell off large amounts of U.S. MBS or Treasuries, it could indeed cause a short-term shock. Yields would spike, mortgage rates would rise, and financial markets could be thrown into chaos. But many analysts believe it wouldn’t be a long-term win for China.
“China dumping Treasuries would be the equivalent of lobbing a hand grenade at someone sitting across from you in a room,” said Mark Williams of Capital Economics. China holds around $3 trillion in dollar-based assets. Selling them would crash their own portfolio. The value of the dollar would drop, making the rest of their holdings worth less, and any cash brought back into China would raise the value of their currency, hurting exports.
Moreover, the U.S. Federal Reserve could step in with a massive quantitative easing program, just as it did during the pandemic. In 2020, when other countries sold U.S. Treasuries, yields briefly spiked—but the Fed bought over $1 trillion in bonds to bring rates back down.
Still, the very act of China even threatening to dump U.S. MBS could spook investors and cause market turmoil. It’s a powerful psychological weapon, even if the damage might be short-lived.
The Real Danger: A Market Built on Illusions
The most disturbing part is that the U.S. housing market may not need a foreign attack to collapse. With inflated prices, widespread fraud, and a shaky financial foundation, the market already resembles a house of cards.
As Strong Towns author Charles Marohn put it, America has turned homes into financial products, not places to live. Government agencies like Fannie Mae are more focused on supporting high prices than making housing truly affordable. Even now, new regulations are just beginning to require banks to verify basic information before issuing million-dollar loans.
