MBS Trends Are Changing

Bank and thrift holdings of agency mortgage-backed securities (MBS) pass-throughs fell for the first time in the first quarter of 2018 and then again in the second quarter after rising for 14 consecutive quarters, according to a report analyzing the capital markets. The report was prepared for Ginnie Mae by State Street Global Advisors and the Urban Institute's Housing Finance Policy Center.

The report, which also covered the state of the U.S. housing market, the U.S. agency market and originations as well as an analysis on Ginnie Mae's nonbank originators, revealed that while the ownership of Ginnie Mae MBS by banks and thrifts remained largely unchanged from the end of last year, all of the nearly $33 billion drops in pass-throughs came from conventional MBS.

Explaining this decline, the report said that while it was a small portion of the total $1.35 trillion agency MBS pass-throughs held by banks and thrifts, the change was "noteworthy because it could be an early indicator of a long-term trend."

The report said that banks had increased their ownership of federally-backed agency MBS during the crisis in part due to low demand for loans from consumers and businesses during the recession. "But this demand may now be coming back against the backdrop of a stronger economy," it analyzed. "Commercial and industrial loans held by banks jumped by nearly $100 billion while overall bank credit grew by $135 billion in the first half of 2018, according to Federal Reserve data."

It also pointed to the dramatic steepening of the yield curve over the last year that has caused the spread between short-term borrowing rates and MBS yields to reduce, making agency MBS less attractive than before. "The spread
between 3-month LIBOR and current coupon MBS tightened from about 215 bps at the beginning to 2017 to approximately 125 bps at the end of Q2 2018. Collectively, less attractive returns on agency MBS and increased loan demand may be leading banks to reduce their agency MBS holdings," the report revealed.

Looking at the relative attractiveness of US Fixed Income and Ginnie Mae's MBS, the report found that US MBS comprised 28 percent of the Barclays US Aggregate Index, which was less than either the US Treasury share (38 percent) or the US Credit share (30 percent).

However, Fannie Mae's 30-year MBS comprised the largest percent of US MBS at 10 percent followed by Ginnie Mae and Freddie Mac's 30-year MBS at 8 percent and 6 percent respectively.

"Mortgages with terms of 15 and 20 years comprise the remaining balance (4 percent) of the US MBS share. US securities are the largest single contributor to the Barclays Global Aggregate, accounting for 39 percent of the global total. US MBS comprises 11 percent of the global aggregate," the report revealed.

Read details about Ginnie Mae's originations and the general state of the housing market in the report.