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27 » VISIT US ONLINE @ DSNEWS.COM MBS TRENDS ARE CHANGING Bank and thrift holdings of agency mortgage-backed securities (MBS) pass- throughs fell for the first time in the first quarter of 2018 and then again in the second quarter after rising for 14 consecutive quarters, according to a report analyzing the capital markets. e report was prepared for Ginnie Mae by State Street Global Advisors and the Urban Institute's Housing Finance Policy Center. e report, which also covered the state of the U.S. housing market, the U.S. agency market and originations as well as an analysis on Ginnie Mae's nonbank originators, revealed that while the ownership of Ginnie Mae MBS by banks and thrifts remained largely unchanged from the end of last year, all of the nearly $33 billion drops in pass- throughs came from conventional MBS. Explaining this decline, the report said that while it was a small portion of the total $1.35 trillion agency MBS pass-throughs held by banks and thrifts, the change was "noteworthy because it could be an early indicator of a long-term trend." e report said that banks had increased their ownership of federally-backed agency MBS during the crisis in part due to low demand for loans from consumers and businesses during the recession. "But this demand may now be coming back against the backdrop of a stronger economy," it analyzed. "Commercial and industrial loans held by banks jumped by nearly $100 billion while overall bank credit grew by $135 billion in the first half of 2018, according to Federal Reserve data." It also pointed to the dramatic steepening of the yield curve over the last year that has caused the spread between short-term borrowing rates and MBS yields to reduce, making agency MBS less attractive than before. "e spread between 3-month LIBOR and current coupon MBS tightened from about 215 bps at the beginning to 2017 to approximately 125 bps at the end of Q2 2018. Collectively, less attractive returns on agency MBS and increased loan demand may be leading banks to reduce their agency MBS holdings," the report revealed. Looking at the relative attractiveness of US Fixed Income and Ginnie Mae's MBS, the report found that US MBS comprised 28 percent of the Barclays US Aggregate Index, which was less than either the US Treasury share (38 percent) or the US Credit share (30 percent). However, Fannie Mae's 30-year MBS comprised the largest percent of US MBS at 10 percent followed by Ginnie Mae and Freddie Mac's 30-year MBS at 8 percent and 6 percent respectively. "Mortgages with terms of 15 and 20 years comprise the remaining balance (4 percent) of the US MBS share. US securities are the largest single contributor to the Barclays Global Aggregate, accounting for 39 percent of the global total. US MBS comprises 11 percent of the global aggregate," the report revealed. IT PAYS TO BE A LANDLORD Owning a home and renting it out is the best way to climb up the wealth pyramid especially in the U.S. A recent working paper by Pirmin Fessler and Martin Schürz at the Austrian Central Bank, Oesterreichische National Bank (ONB), broke down the U.S. wealth survey to compare wealth between the U.S. and countries in the Eurozone. e study which gave insights into the classification of households based on decisive functions of their wealth holdings, found that social structures concerning wealth could be characterized by renters, homeowners, and capitalists. According to this study, the reason capitalists were generally in the top percentile of the wealth pyramid was because of their ability to not only own their home but "additionally rent out further real estate and/or have self-employed business wealth." While renters mainly had wealth for precautionary reasons, the paper said that homeowners in "by means of owner occupation generate non-cash income from their wealth." Looking at the U.S. housing market, in particular, the study found that while the share of renters was 35 percent, homeowners formed the biggest chunk at 50 percent. Despite the share of capitalists/homeowners who rented their properties being only 15 percent, the study revealed that renters were mostly found in the lower half of the wealth distribution, owners mostly in the upper- middle part and capitalists dominantly in the very upper part. In both, the United States and the Euro area, the study found that only a few capitalists were found to be in the lower part of the wealth distribution. Conversely, only a few renters were found in the upper part of the wealth distribution. Analyzing the wealth distribution among these four groups, the study found that the form of income played a major role in defining these social classes. It also revealed that capitalists in all the countries in the study had an overproportional share in income and wealth, while renters across all these countries had an under-proportional share of income and wealth. In fact, renters in the U.S. had the smallest income ratios at 0.47, while the capitalists and landlords had the highest at 2.5. When compared with Europe however, capitalists in the U.S. were beaten by their counterparts in Austria who had an income ratio of 4.7. e study also found rather large differences in country patterns as far as wealth distribution was concerned among these three groups. "Wealth distances between renters and capitalists are largest in Austria, the United States, Germany and Luxembourg, but with regard to the income they are among the smallest in Austria, Germany, and Luxembourg whereas by far the largest in the United States," the study revealed.

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