FDIC has liquidated around 70% of agency mortgage assets from crisis

The Federal Insurance Corp. is more than two-thirds done with its liquidation of agency mortgage-related assets from the banking crisis, according to FHN Financial estimates.

"The FDIC liquidation process has gone quite well by any objective standard and is now ~70% complete," Walt Schmidt, senior vice president of mortgage strategies, said in the report published Tuesday.

Nearly 80% of pools and 50% of collateralized mortgage obligations from agency portfolios the FDIC seized have been auctioned off, according to the report. Schmidt said this puts the process on track for completion by September.

Banks are typically heavy investors in agency mortgage-backed securities so questions have been raised about how the FDIC asset sales and new pending capital rules could affect ownership and supply-demand balances in the broader market. How inversion in the curve formed by short- and long-term bond yields could impact the market is also an unknown.

Agency MBS, which are backed by government-sponsored enterprises, have retained a strong credit profile, which capital rules are typically contingent on. But certain older MBS contributed to the problems for troubled institutions like Silicon Valley Bank that faced a run on deposits.

Older MBS are backed by loans originated at lower rates than those available for loans originated today, so distressed banks too heavily weighted in them found themselves at risk of recording a relative loss on sales of them under accounting rules.

U.S. depositories remain significant investors in mortgage-backed securities in general so far, according to FHN Financial's analysis of data from the Federal Reserve Bank of New York.

"Domestic banks still represent the largest single sponsor group of MBS," Schmidt said.

Banks are typically supposed to monitor the value of their assets relative to their potential liabilities to prevent the former from outweighing the latter.

Some experts have said other banks could be holding older MBS that would generate paper losses if those assets had to be suddenly sold due to a bank run.

Tim Mayopoulos, a former GSE executive tapped to lead the Silicon Valley bridge bank, told NMN's sister publication, American Banker earlier this year that the circumstances of the institutions affected by the crisis have been characterized as idiosyncratic, but that they weren't entirely.

"There are a fair number of banks in the United States that have the basic asset-liability mismatch that plagued SVB," he said.