Mortgage-Backed Securities Held By U.S. Commercial Banks Surpasses $2 Trillion: Cause For Concern?

Mortgage-backed securities (MBS) played a pivotal role in triggering the 2008 recession. And there was a notable reduction in the amount of MBS U.S. banks held on their balance sheet immediately after the downturn. But banks have been doubling down on the once-reviled asset class over recent years, with data compiled by the Federal Reserve showing that this figure breached the $2-trillion mark for the first time ever this August.

We believe that the trend in itself is not a cause for concern. After all, the government has taken significant steps to regulate the mortgage securities market after the downturn. Also, with the U.S. mortgage industry remaining weak over several years now, the conditions under which the MBS portfolio of the banks has grown this time around are quite different from what were prevalent in the run-up to the 2008 downturn. Trefis highlights How Mortgage-Backed Securities Issued In The U.S. Have Changed Since The Sub-Prime Crisis in considerable detail in an interactive dashboard, parts of which are summarized below.

What is a Mortgage-Backed Security and why it is important?

• A mortgage-backed security (MBS) is a type of asset-backed security similar to a bond, and is made of a bundle of home loans bought from the banks/agencies that issued them.
• Investors in MBS receive periodic payments similar to bond coupon payments.
• Government-backed agencies, federal banks as well as private issuers can issue and guarantee MBSs.
• However, mortgage-backed security is only as good as the underlying mortgages.

Understanding How The Mortgage-Backed Securities Market Has Evolved After The Crisis:

#1. Total Mortgage-Backed Securities (MBS) In The U.S. Have Been On The Rise Since 2013

• Total MBSs issued across all markets in the US shrank for 5 consecutive years after the economic downturn of 2008 but has been seeing steady growth over the last 5 years.
• This metric stood at $9.4 trillion in 2007 and now stands at $9.7 trillion – an increase of just around 4%.
• However, we believe stricter regulations and keen oversight by the government has kept the growth of MBSs in check.

#2. Mortgage-Backed Securities Held by All Commercial Banks have gone up from less than $1 trillion in 2009 to over $2 trillion now

• Total mortgage-backed securities held by U.S. commercial banks have gone up from around $1 trillion in 2009 to almost $1.9 trillion in 2018. This implies an average annual growth rate of 7.2%.
• Interestingly, MBSs held by banks saw a decline only in 1 year in the last decade, in 2013. In all other years, this figure has seen steady growth.
• Moreover, Mortgage-Backed Securities held by Federal Banks have also been on the rise – more than doubling from around $0.8 trillion in 2009 to $1.8 trillion now.

Actual data around the value of MBS held by U.S. Commercial Banks as well as Federal Banks for each year since 2009 is available in our interactive dashboard.

#3. U.S. Commercial Banks Now Hold More MBSs Than Federal Banks, Again

• The proportion of MBS held by Federal Reserve Banks to Commercial Banks fell from 92% in 2010 to around 66% for 2011-12 before shooting up to 124% in 2014 as Federal Reserve Banks absorbed a majority of MBSs created.
• The trend reversed in subsequent years, though, with the figure shrinking to 88% by 2019.

#4. However, the Share Of 5 Major US Commercial Banks Has Seen A Steady Decline Since 2009

• Total MBSs held by the 5 major commercial banks have gone up from $393 billion in 2007 to around $688 billion.
• Despite an increase in the absolute values, the share of these banks in MBS held by commercial banks has gone down from almost 63% in 2009 to less than 37% in 2018.
• Details about trends in the MBS portfolio for Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Goldman Sachs since the economic downturn can be found in our interactive dashboard.

Conclusion: Mortgage-Backed Securities In US Have Marginally Increased After The Crisis

• Total MBSs issued in the U.S. have gone up since the financial crisis due to nominal growth in the housing market.
• However, stricter regulations and keen oversight by the government has kept the growth of MBSs in check, with the market growing by less than 5% in the last decade.
• With the housing market remaining robust in the U.S.,  we expect MBSs to steadily increase in the coming years.

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