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Cash-flush banks stock up on agency MBS

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The top-50 banks stocked up mortgage-backed securities guaranteed by the government and cash during the second quarter as new home loan originations remained suppressed. According to the National Information Center's aggregated financial statements, the largest banks added roughly $9 billion in agency MBS in the second quarter. Non-agency, or privately funded, MBS declined $300 million. Banks grew their cash or cash-equivalent holdings by $225 billion to more than $3 trillion in the second quarter. Meanwhile credit, at least for mortgages, remained constrained. "On the loan front, although residential lending remained tepid, it showed some improvement from the previous quarter," Barclays Capital analysts said after reviewing the report. Holdings of one-to-four family home loans climbed $1.4 billion at the top banks to more than $1.16 trillion. Third quarter agency MBS holdings will be watched closely as the market adjusts to the downgrade of the U.S. debt and consequentially Fannie Mae and Freddie Mac. Some in the market are already expecting agency MBS to remain in demand after the default. The Securities Industry and Financial Markets Association said last week following the downgrade that agency MBS showed tightening spreads and even grew in demand among real estate investment trusts. In a time of such volatility in other markets, U.S. debt was still considered a safe bet to many investors, analysts said. Write to Jon Prior. Follow him on Twitter @JonAPrior

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