By the Numbers
FHFA proposals may lift MBS demand
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Banks, insurers and other institutions borrowing from the FHLBanks may soon need to hold an ongoing 10% of their total assets in mortgage loans, securities and related instruments. This requirement would apply under a new proposal from the Federal Housing Finance Agency, the FHLBanks’ regulator. If this rule were in force today and all US commercial and savings banks and credit unions wanted the option to borrow from the FHLBanks, banks and credit unions would have to increase investment in target assets by $96 billion. And since agency MBS would be among the fastest ways to add assets, MBS could see new demand.
The proposed rule attempts to fix inconsistencies in current requirements for FHLBank membership and borrowing, according to the FHFA. Federally insured depositories and credit unions today need at least 10% of assets in housing investments to join a FHLBank, but that share can drop afterwards. The FHFA sees an ongoing requirement as a way to ensure “members continue to support the FHLBank mission.”
Currently 638 US commercial and savings banks and 1,849 US credit unions have target assets—single- and multifamily mortgage loans, MBS pass-throughs and CMOs and agency CMBS—of less than 10% of total assets, according to regulatory filings available from S&P. Access to FHLBank funding presumably would be a significant incentive to bring that share up to 10%, although there is no guarantee that all institutions would join the FHLBank system and get to the required minimum. If all institutions did join and added exposure, it would increase bank housing investment by $93 billion and credit union investment by $3 billion.
For banks, only 12.9% of institutions have less than 10% of assets in instruments the FHLBanks consider “mission related” (Exhibit 1). The largest shortfalls are seen at broker-dealers as well as banks that are heavily concentrated in other loan types such as credit cards and student loans.
Exhibit 1: Only 12.9% of banks have less than 10% assets in target instruments
Source: S&P Capital IQ, Santander US Capital Markets
For credit unions, nearly 25% have no target assets at all and a cumulative 39% have less than 10% of total assets in target investments (Exhibit 2). Most of these are small institutions, and the absolute shortfall is much smaller than banks’.
Exhibit 2: More than 39% of credit unions have under 10% FHLBank mission assets
Source: S&P Capital IQ, Santander US Capital Markets
Demand for MBS could increase further if insurers and other members outside of depositories chose to get to the 10% mark.
FHFA plans to start the rulemaking process shortly and analyze its impact on members before finalizing its requirements.
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