FDIC To Gradually Auction $114B In MBS Seized From Failed Banks

By Steve
April 10, 2023
2 min read

FDIC To Gradually Auction $114B In MBS Seized From Failed Signature Bank and Silicon Valley Bank

FDICThe FDIC has decided to sell a portfolio of $114 billion in mortgage-backed securities (MBS). The FDIC seized control of the MBS portfolios after taking control of Signature Bank and Silicon Valley Bank. 

The face values of SVB’s portfolio is approximately $87 billion. Where as Signature Bank’s assets are valued at $27 billion. The portfolios consist primarily of agency and commercial MBS. In addition, the portfolio also contains collateralized mortgage obligations. 

BlackRock Financial Market Advisory will conduct the portfolio sale. The FDIC aims to minimize the potential for any adverse impact on market. 

SVB collapsed on March 10th  marking the biggest bank failure since Washington Mutual in 2008. The FIDC took control of the bank and named Tim Mayopoulos as CEO of the “bridge bank” meant to protect all depositors.

Bad Banking Decisions Led To Their Demise And FDIC Take Over

Signature disastrously bet big on crypto. This bad decision caused the bank to shut down two days later. Flagstar Bank, owned by New York Community Bank, assumed most of Signature’s bridge bank deposits. They also acquired certain assets, business lines and liabilities. 

These regional banks suffered a liquidity crisis amid a classic deposit run. Both carried short-term deposit risk against a longer-term investment portfolio. Ultimately, the banks failed to sell their assets to pay for customers’ withdrawals. They also failed to sell mortgage-backed securities. MBS are usually long-term investments. They are also one of the last resources to improve banks’ liquidity.

SVB failed to raise capital to plug a $1.8 billion loss from selling a $21 billion portfolio of available-for-sale securities. 

Much of the failed bank’s MBS portfolio involves mortgages originated before the Federal Reserve’s tightening monetary policy. It means the 30-year fixed mortgage rates were at 3% or less, versus more than twice that rate now, and these securities are underwater. (Rates were at 6.28% as of April 4).  

The FDIC is selling the Signature and SVB portfolios may reduce MBS prices. Some secondary market analysts also expect other banks facing liquidity issues to sell their MBS portfolios. Thus, putting even more pressure to the market. 

This Article Originally Appeared On MFI-Miami

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