Housing Finance at a Glance: Monthly Chartbooks
The February 2019 edition of At A Glance, the Housing Finance Policy Center’s reference guide for mortgage and housing market data, includes updated figures describing mortgage affordability by MSA, effective guarantee fees charged on new acquisitions, mortgage insurance activities and a special quarterly feature on GSE loan composition, repurchase rates, defaults, and loss severity.
After years of growth, commercial banks’ agency MBS holdings are retreating
Commercial banks and thrifts significantly ramped up their ownership of agency mortgage-backed securities (MBS) after the financial crisis began in 2008. The chart below shows the total volume of agency pass-throughs and collateralized mortgage obligations (CMOs) owned by banks and thrifts since 2000. Pass-through volume is broken out separately for Fannie Mae and Freddie Mac (the GSEs) and Ginnie Mae.
Banking institutions gradually increased their ownership of agency pass-throughs and CMOs from about $765 billion at year-end 2007 to a peak of nearly $1.8 trillion at the end of 2017. As a share of total agency MBS outstanding, they owned 17.5 percent at year-end 2007 compared to 29 percent at year-end 2017. Except for a few isolated quarterly declines (mostly during the bubble), bank holdings of agency MBS increased consistently from 2008 to 2017, driven mostly by growth in both Ginnie Mae and GSE pass-through MBS.
Bank and thrift agency MBS holdings
Banks increased their ownership of federally-backed agency MBS during the crisis in part because of low demand for loans from consumers and businesses, as well as reduced lender appetite for risk during the recession. However, as the economy improved, demand for loans slowly came back.
Federal Reserve data show that bank commercial and industrial loans outstanding jumped by nearly $200 billion from year-end 2017 to year-end 2018; overall bank credit grew by $560 billion over the same period.
Additionally, dramatic flattening of the yield curve over the last year has reduced the spread between short-term borrowing rates and yields on agency MBS. Since the end of 2017, the spread between the current coupon MBS and the 3-month LIBOR rate has shrunk from 135 basis points to about 75 basis points. As a result, agency MBS are less attractive as an investment today than they were previously. In sum, less attractive returns on agency MBS and increased loan demand is likely leading banks to reduce their agency MBS holdings.
However, a turning point came in early 2018. After 14 consecutive quarterly increases, bank and thrift holdings of agency MBS fell slightly in Q1 2018. This was followed by small but back-to-back decreases in Q2 and Q3 2018 to $1.75 trillion, down $36 billion from the year-end 2017 peak level. All the decline came from GSE MBS; bank ownership of Ginnie MBS is up marginally since year-end 2017.
While the $36 billion decline is small, it is noteworthy because it signals the likely end of a recession-era trend.