The Chinese used to be the biggest purchaser of the loan contracts from Fannie and Freddie. However, starting about five years ago - after the Bush tax cuts went through, exploding the deficit - the Chinese started to sell because of the falling dollar. Now, they are speeding up dumping those loans and NOT buying any more new ones.

Our government's deficit and heavy borrowing (again, this problem could be made a lot better by getting rid of Bush's tax cuts, though not completely solved) has led to a cheaper dollar which is killing the profits for the Chinese investments and even making them lose money on their dollar-denominated holdings, including those mortgage contracts from Freddie and Fannie. Thus, we are in a Catch-22: we have to raise interest rates to combat the falling dollar, which fucks the ARM-holders, second and third mortgage holders, and new potential buyers, OR, if we don't and we cut interest rates, we ensure that China continues its exodus OUT of dollar-denominated holdings...not only these mortgage contracts, but even T-bills. Scary.

However, the government could strengthen the dollar without the Fed having to raise interest rates (and even may be able to lower them some) by ending Bush's tax cuts. This would lower the deficit and may even create a surplus in a few years. One other way we could lower the deficit is to STOP SPENDING ALL THIS FUCKING MONEY IN IRAQ AND END THE FUCKING WAR!!!