FTDO: Some MBSs may extend and not pay down as expected

Summary: Most mortgagees have locked in long term funding at low rates as just over 70% of loans are less than 24 months old and have a rate of 3.625% or lower. Increasing FED Funds will likely have less of an effect on the spending power of these newly (re)financed borrowers. This, among other factors, could add further stresses to community financial institution balance sheets.


  • Looking at the 30yr GSE (Government Sponsored Entities) The mortgage universe is around 4.5 trillion when one considers FNMA and FHLMC
  • 71% of the loans are less than 24 months old and have a rate of 3.625% or lower
  • 5% of the loans that have 24 months or more seasoning have rates less than 3.625%
  • 20% of the loans that have 24 months or more seasoning have rates higher than 3.625%

Banks have increased their MBS holdings from 2 trillion in Jan of 2020 to just under a current 3 trillion. If one assumes that half the original 2 trillion has paid down this means community financial institutions (banks specifically) own 2 trillion of lower coupon MBSs. These holders are subject to higher fed funds and that may limit how much the fed will be able to raise rates without hurting the banking system. Look specifically at the data concerning Commercial Banks MBS Holdings Treasury and Agency Securities: Mortgage-Backed Securities (MBS), All Commercial Banks (TMBACBW027SBOG) | FRED | St. Louis Fed (stlouisfed.org).

As the FED hikes its rate, we might expect to see less of a reduction in the money supply attributable directly to FED rates than expected and more stress on the banking system which might make quantitative tightening more attractive versus raising FED funds at a steeper curve later in the year. Both outcomes should be considered in forward looking planning and excess liquidity solution planning.

As always, consider a first or second opinion from SB Value Partners.

Let SB Value help you examine all these, and other methodologies, to build out your future pathways to optimizing your success.

Questions? ASK US HOW to start a complementary analysis now. It’s a great time to get some additional clarity. Learn some additional truths on the front end. It may position your bank for added improvements in 2022. Listen to what a few thought leaders have to say who have written white papers on the topic at hand. Take a read through a few Fact Sheets on the subject 1. here, 2. here, and 3. here.

As fiduciaries we see quite a lot – in fact we have recently reviewed just under 14,000 data points from Community Financial Institutions – likely just like yours. We look forward to sharing with you some of what we have learned. In the meantime, we thought we would help with some general information that you and your team can consider right away to round out what you are already doing. There is a lot that’s beneficial, starting with cost savings, yield improvements, and likely better balance – even protection. To find out more please click here on our website.