There were significant adjustments in bank mortgage-backed holdings over the third quarter, but the net effect on these holdings for the third quarter stays unchanged compared to the previous one.

In a JPMorgan Securities report released recently, analysts noted that the top 25 banks' total MBS holdings dipped by $6.2 billion - which comprised $2.8 billion in passthroughs and $3.4 billion in CMOs - in 3Q06. Over the quarter, there have been some considerable changes in holdings among the top five banks. However, the net effect among the top 25 was comparatively unchanged, with overall holdings down by 1%. Bank of America, Wachovia Corp., and Wells Fargo sold $43 billion, $13 billion, and $19 billion, respectively.

But, as of quarter end, JPMorgan Chase and Citigroup added $12 billion and $53 billion, respectively. Although JPMorgan Securities analysts noted that the large changes in holdings could each be a one-time event, they still did a review of the transactions that were widely discussed just because the shifts were significant.

Citigroup showed a significant rise in securities holdings as of the third quarter, most of which was in MBS (over $53 billion).

According to the bank's earnings conference call and JPMorgan's conversations with equity analysts, Citigroup has opted to move some loans, after securitizing them, into the MBS portfolio. By doing this, Citigroup could either sell the mortgages in a securitized form or retain the MBS on balance sheet, JPMorgan analysts said.

Bank of America also said that it plans to restructure their balance sheet to hold less amounts of debt securities versus loans and expects to limit MBS holdings by at least $100 billion in the next two years. As a result of this strategy, BofA sold about $43 billion of MBS late in the third quarter. In BofA's third quarter 10-Q, the company implied that it might hold the remaining MBS balance, believing that the third quarter sale, along with paydowns, would achieve their $100 billion reduction goal in the next few years.

JPMorgan Securities analysts also noted that the MBS share of total security holdings is still high. Data published by JPMorgan showed that MBS is still the dominant asset class for security holdings, with most institutions having over 75% of securities portfolio in MBS. But, this number differs considerably by institution, JPMorgan analysts stated. The most notable increases since the second quarter were Citigroup and PNC, with their MBS shares rising by 20% and 10%, respectively. Citigroup has always held low MBS levels compared to mortgage loans. As for the third quarter, its residential first lien mortgage portfolio exceeded twice its MBS holdings. PNC's total securities portfolio dropped while MBS holdings increased slightly.

Bank deposits see slight dip

The top 25 banks' deposits in domestic offices dropped by $41 billion in the third quarter (-1% quarter over quarter), JPMorgan Securities analysts noted. The biggest dips came from BofA, JPMorgan, and Wells Fargo. The low cost core deposits dropped faster in the third quarter, shifting funds into higher yield CDs. With continued competition from money market funds, a shift in deposit composition is probably going to continue in the near-term and put pressure on banks' net interest incomes, JPMorgan analysts said. But, overall, deposit costs rose at a slower rate in the third quarter compared to the previous quarter. On average, bank MBS holdings as a percent of total deposits were around 23%. Also, the MBS share of total deposits can vary dramatically among institutions, analysts said.

In terms of passthroughs, JPMorgan analysts said that - aside from the large changes mentioned earlier that were supposedly caused by conventional holdings - GNMA holdings dropped by $2.3 billion while non-agencies increased by $2.2 billion. Wachovia made up for virtually the whole amount of the drop in GNMA holdings. In non-agencies, most of the increase was because of PNC adding $1.7 billion.

Meanwhile, the top 25 banks ranked by CMO holdings held $208 billion in CMOs. The agency CMO holdings grew by $5 billion while non-agency CMO holdings dipped by more than $8 billion.

Citigroup was the largest buyer in the agency CMO sector, adding almost $6 billion. Bank of New York, Wachovia, and Wells Fargo experienced the biggest drops in non-agency CMOs.

Banks' first lien residential loan holdings were $5.5 billion lower than the second quarter at the end of the third quarter, JPMorgan Securities analysts reported.

Bank of America and Citigroup continued to have the biggest holdings with $219 billion and $152 billion, respectively. Overall, mortgage loan activity was relatively less robust in the third quarter as compared to previous quarters. However, looking ahead, JPMorgan analysts expect banks to slowly shift mortgage demand towards loans.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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