Securities & Investments
Mortgage-Backed Securities
Also known as MBS
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
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 interpret
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 | Label | Interpretation |
|---|---|---|
| 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
Frequently asked
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)
See MBS across 4,335 US banks
BankRegReports ranks every FDIC-insured institution by MBS, refreshed quarterly within 48 hours of FFIEC release.