Falling market values for Fannie/Freddie pass-throughs played a big part in the decline in bank investment in residential MBS during the second quarter. Holdings of Ginnie MBS and non-agency securities were up. (Includes two data charts.)
The Federal Reserve giveth and taketh away in the agency MBS market. And now that the central bank’s investment activity is significantly curtailed, investors are seeing some opportunities in the sector.
With FHA loan performance relatively strong and the spike in interest rates this year, early buyout activity from Ginnie MBS is limited. Overall, removals are slowing thanks to elevated interest rates. (Includes data chart.)
The mismatch between falling interest income at the Fed and growing interest expense is projected to result in deferred assets of between $60 billion and $150 billion.
The two largest REITs in terms of holdings of agency MBS noted extreme volatility in the second quarter while also suggesting that market dynamics are set to improve.
Spreads on various types of residential MBS are wider than they were during the early days of the pandemic, suggesting that the assets aren’t particularly attractive to investors. However, that isn’t necessarily true.
The REIT has built up strong residential and MSR businesses to diversify risk and support its agency prowess. And while it’s held back on increasing leverage, once volatility declines, all that may change.
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