TD Bank, State Street, Northern Trust and several other banks bucked the trend and increased their ABS investment during the third quarter. But the industry's total holdings fell 1.5% from June. (Includes two data charts.)
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Investors in some prime non-agency MBS are taking losses even though loans in the deals are performing well. The red ink is tied to variable servicing fees and high prepayment rates.
Provident Funding is set to issue a non-agency MBS with standard mortgages eligible for sale to the GSEs. An affiliate of Cerberus is also planning a relatively large deal backed by seasoned mortgages.
The $302.8 million transaction is comprised of fully collateralized excess-of-loss reinsurance coverage from Triangle Re on a portfolio of existing MI policies written this year.
The Fed has significantly stepped up purchases of agency MBS in recent months. However, the central bank's balance sheet shows no sign of an increase in MBS holdings, prompting some questions. Meanwhile, shoring up the repo market might be a factor.
The novelty of prepayment as a primary risk factor is one of the charms MBS have for foreign investors, particularly sophisticated institutional investors. That’s because it has a relatively low correlation factor with other assets.