Banks Hang on to Mortgages, but Reduce Risk

We previously noted that the recent surge in bank deposits, that is related to rising risk aversion associated with the onset of the Covid-19 crisis, serves to support bank investment in agency Mortgage Backed Securities (MBS)[1]. A look at recent Federal Reserve Board data reveals that growing MBS demand is not just the result of greater deposits, but also is due to a desire on the part of depository institutions to reduce risk in the mortgage space.

As the chart above shows, banks are in fact growing their holdings of agency MBS but at the same time are reducing their holdings of whole loans. In this way they can maintain their presence in the mortgage market but shift the credit risk to the GSE’s (Fannie Mae and Freddie Mac). The surge in securitizations we see in the April data[2] is not just due to the borrower response to lower mortgage rates, but also to the desire of lenders to reduce their credit risk.

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[1] https://www.recursionco.com/blog/banks-are-important-to-the-mortgage-market-part-1
[2] https://www.recursionco.com/blog/fed-policy-and-the-mortgage-market