Homebuilding - Digging Into April SIFMA Data, Rates and Bank MBS Holdings

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Homebuilding - Digging Into April SIFMA Data, Rates and Bank MBS Holdings

Truist Securities

from falling mortgage rates in 2 main categories. The first is that lower mortgage rates help to spur some buyer demand and can boost

consumer confidence. The second is that lower mortgage rates make it cheaper for builders to offer certain financing incentives.

Still Looking for a Bottom in Commercial Bank Relative MBS Ownership. Commercial banks are one of the largest holders of MBS

in the US, with over $2.7 trillion in total commercial bank MBS holdings as of the end of April according to the Fed's H-8 release. On a

dollar basis, this is up about 7% over the past 2 years, but bank MBS holdings are well behind where they have been relative to their

total agency and Treasury security portfolios. During the 2010s, this averaged around the 70% mark, though this has fallen substantially

since the pandemic to the current level in the upper 50s. Given that commercial banks are major MBS holders, a turn in MBS holdings

at the commercial banking level could be a tailwind for the homebuilding sector.

Regulatory Changes Cut Into MBS Returns for Commercial Bank Holders. When the Basel Committee finalized its Liquidity Coverage

Ratios for US banks in late 2014, it called for banks to be charges a 15% penalty on the market value of level 2A high-quality liquid

assets held on bank balance sheets (including agency MBS). Our understanding of this matter is that it effectively reduces the efficiency

of the MBS portfolio and appears to immediately reduce the attractiveness of MBS compared to Treasury securities, which are level 1

assets and not charged a penalty. The purpose of this was to account for tail risk scenarios in which MBS would lose significant value

in a liquidity crunch.