The Federal Deposit Insurance Corporation (FDIC) has decided, in a “gradual and orderly” move, to sell a portfolio of $114 billion in mortgage-backed securities (MBS) it retained after seizing control of failed regional banks Signature Bank and Silicon Valley Bank (SVB).
The face values of SVB’s portfolio is approximately $87 billion, while Signature Bank’s assets are valued at $27 billion. The portfolios consist primarily of agency and commercial MBS and collateralized mortgage obligations.
BlackRock Financial Market Advisory will conduct the portfolio sale, which “will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions,” the FDIC said in a statement.
California-based SVB, which focused on the tech community, collapsed on March 10, marking the biggest bank failure since Washington Mutual in 2008. The FIDC took control of the bank and named former Fannie Mae CEO and Blend president Tim Mayopoulos as CEO of the “bridge bank” that is meant to protect all depositors.
New York-based Signature, a large multifamily lender that disastrously bet big on crypto, shut down two days later. Flagstar Bank, owned by New York Community Bancorp, assumed most of Signature’s bridge bank deposits and acquired certain assets, business lines and liabilities.
These regional banks suffered a liquidity crisis amid a classic deposit run. Both carried short-term deposit risk against a longer-term investment portfolio. Ultimately, the banks failed to sell their assets to pay for customers’ withdrawals, and mortgage-backed securities, which are usually long-term investments and one of the last resources to improve banks’ liquidity, were among these assets.
To illustrate, SVB failed to raise capital to plug a $1.8 billion loss from selling a $21 billion portfolio of available-for-sale securities, which included MBS. As of December 31, 2022, the bank had a securities-investment portfolio of $64 billion in agency-issued MBS, per Securities and Exchange Commission (SEC) filings. But $57.7 billion in MBS was marked as being “held to maturity.”
Much of the failed bank’s MBS portfolio involves mortgages originated before the Federal Reserve’s tightening monetary policy. It means the 30-year fixed mortgage rates were at 3% or less, versus more than twice that rate now, and these securities are underwater. (Rates were at 6.28% as of April 4).
The FDIC is selling the Signature and SVB portfolios that it retained, which can reduce MBS prices. Some secondary market analysts also expect other banks facing liquidity issues to sell their MBS portfolios, putting even more pressure to the market.
“No one knows how much of the MBS portfolio these regional banks are going to sell necessarily,” a secondary market executive at a brokerage firm told HousingWire. “And where it’s interesting is: Who will be absorbing any MBS sales, if they do come to market, as these banks are typically the natural buyers of mortgage bonds.”