Jody Shenn at Bloomberg uncovers an interesting trend: banks with the largest portfolios of mortgage-backed securities are bulking up their portfolio of non-agency holdings, even as the market for such securities has all but disappeared -- to the tune of an estimated $48 billion in new additions during the fourth quarter, according to a Barclays report released yesterday. That boost came while the same banking institutions, including Bank of America and Citigroup, divested more than $11 billion of agency MBS. The result was that banks' MBS portfolios reached roughly $582 billion by the end of the quarter, Bloomberg reported. The reason for the jump isn't because banks wanted to actively grow their positions in a troubled security class, Shenn notes:
The banks, which also include Wells Fargo & Co., Wachovia Corp. JPMorgan Chase & Co., probably boosted non-agency holdings, the analysts wrote, because of the dearth of investor demand for new securities backed by loans they were making, a need to consolidate off-balance-sheet vehicles that lost other funding, and margin calls on "leveraged" investment funds. "It seems unlikely that banks were active non-agency buyers," the analysts wrote.
In addition to possibly reducing the banks' appetite for other forms of asset-backed bonds -- ahem, CMBS, anyone? -- it seems possible that the portfolio bulk-up is likely to keep some of the larger banks more exposed to the mortgage downturn than they might otherwise like to be.