---
title: "Mortgage-Backed Securities: definition, formula, and thresholds"
description: "Mortgage-backed securities (MBS) are bonds backed by pools of home loans. Banks hold mostly agency MBS (guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae), which carry low credit risk but significant interest-rate and prepayment risk."
canonical_url: https://www.bankregreports.com/glossary/mortgage-backed-securities/
source: BankRegReports
category: "Securities & Investments"
units: "$"
schedule: "Schedule RC-B"
---

# Mortgage-Backed Securities

> Mortgage-backed securities (MBS) are bonds backed by pools of home loans. Banks hold mostly agency MBS (guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae), which carry low credit risk but significant interest-rate and prepayment risk.

## Formula

```
MBS = Carrying value of mortgage pass-throughs and CMOs held in the securities portfolio
```

Schedule RC-B breaks securities into Treasuries, agency debt, MBS, and other categories. Agency MBS get a low (often 20%) risk weight for capital, which is why banks hold so many, but their cash flows extend when rates rise, deepening price losses.

## Why it matters

MBS were the single largest source of unrealized losses in bank portfolios during 2022-2023. Their 'negative convexity' means that when rates rise, prepayments slow, the bonds' effective duration lengthens, and prices fall more than a plain bond would, magnifying the hit to AFS equity and HTM marks.

## How to read it

A heavy MBS allocation signals duration and extension risk. Read it with the HTM/AFS split and the unrealized-loss disclosures: long-duration agency MBS bought in 2020-2021 are the classic carrier of the hidden losses that the 2023 crisis exposed.

## Thresholds

| Range | Reading | What it means |
|---|---|---|
| Small / short | Benign | Limited duration and prepayment exposure. |
| Moderate | Normal | Typical agency-MBS allocation. |
| Large, long-duration | Watch | Meaningful extension risk and unrealized-loss potential. |
| Dominant in portfolio | Concern | Concentrated rate/extension risk relative to capital. |


## Worked example

A bank that loaded up on 30-year agency MBS at par in 2021 watched those bonds fall 15-20% in price as rates rose in 2022: and because slowing prepayments extended their duration, they fell further than comparable Treasuries, driving a large share of the bank's unrealized loss.

## Questions

### Are agency MBS risky?

Their credit risk is minimal because of the agency guarantee, but their interest-rate and prepayment (extension) risk is substantial. The 2023 unrealized-loss problem was an interest-rate, not a credit, problem.

### What is negative convexity?

When rates fall, homeowners refinance and MBS prepay, capping the bonds' price gains. When rates rise, prepayments slow and the bonds' duration extends, deepening their losses. This asymmetry is negative convexity.

## Sources

- [FFIEC Call Report Schedule RC-B (Securities)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF)

## Related metrics

- [Total Securities](https://www.bankregreports.com/glossary/total-securities/): Total securities is a bank's entire investment portfolio, held-to-maturity bonds at amortized cost plus available-for-sale bonds at fair value. It is typically the second-largest asset after loans and the bank's main liquidity reserve and interest-rate-risk position.
- [U.S. Treasury Securities](https://www.bankregreports.com/glossary/us-treasury-securities/): U.S. Treasury securities held by a bank are direct obligations of the federal government, the highest-quality, most-liquid assets a bank can own. They carry a 0% capital risk weight and qualify as high-quality liquid assets, but long-dated Treasuries still carry interest-rate risk.
- [HTM Unrealized Losses](https://www.bankregreports.com/glossary/htm-unrealized-losses/): HTM unrealized losses are the gap between the amortized-cost carrying value of a bank's held-to-maturity securities and their lower current market value. The loss is disclosed but not recognized on the balance sheet, a hidden hit to economic capital.
- [AFS Unrealized Losses](https://www.bankregreports.com/glossary/afs-unrealized-losses/): AFS unrealized losses are the mark-to-market losses on a bank's available-for-sale securities. Unlike HTM losses, they are recognized. They flow through accumulated other comprehensive income (AOCI) and reduce book equity each period the securities are underwater.

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