Mortgages have benefited from strong bank demand in 2006. Through the first half of this year, MBS holdings at large U.S. banks surged to $67 billion, compared to $35 billion for all of 2005, according to a recent report from Credit Suisse analysts. They add that so far in 3Q06, large banks have already recorded a $14 billion growth in MBS holdings.

The driving forces for this sponsorship include excess liquidity brought on by strong deposit growth; strong capital ratios, which have forced banks to deploy liquidity to boost earnings; and reasonable ROE on MBS, Credit Suisse analysts said. They expect banks will remain buyers of MBS as long as these factors remain in place. At the same time, strong selling is not anticipated given that unrecognized losses on available-for-sale holdings is at a record high. Should the selling occur, analysts believe it would coincide with "a prized acquisition or with the sale of assets with embedded unrealized gains, thereby offering an opportunity for a balance sheet restructuring," analysts wrote.

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