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Mortgage-Backed Securities Growth Reflects Blazing Real Estate Market

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Top 50 insurers’ pass-through holdings grow to $76.4 billion

A blazing real estate market is being reflected both in the increase in mortgage-backed securities in the market and in a significant increase in pass-through mortgage-backed securities held by life insurers.

Freddie Mac, for instance, grew its retained portfolio of structured securities by 5.7% to just under $678 billion year-to-date through August 2005, while total securities issued increased at an annualized 6.9% rate during the same time period.

One reason for the increase, according to Michael Cosgrove, a Freddie Mac spokesman, is that the price and mix of securities was right in August. In general, there is a demand for these securities and competitive bidding for them can be keen, he adds.

Fannie Mae reports that total business volume for mortgage-backed securities increased to $57.9 billion in August 2005 from the previous month’s $52.5 billion. Additionally, the number of issues that Fannie Mae is guaranteeing is increasing, although because of a restructuring, the number of securities retained in its own portfolio is diminishing, says Janis Smith, a spokeswoman.

Insurers also are growing their pass-through MBS holdings. Mortgage-backed securities continue to be a noticeable portion of life insurers’ gross investment holdings, making up roughly 9.5% of insurers’ investments, according to data culled from the NAIC annual statement database via National Underwriter Insurance Data Services/Highline Data.

And, according to data for the top 50 life insurers ranked by these holdings, when mortgage loans and real estate are factored in with their respective 2.2% and .59% average share of all investment holdings, the average total for all variations of real estate holdings was 12.29% of all investments.

The largest growth for the top 50 came from pass-through mortgage-backed securities, which grew 50% in 2004 to $76.4 billion from $50.8 billion in 2003. Pass-throughs are investments in which all principal and interest are passed through to investors. A caveat to that 50% growth is significant increases–ranging from 105% to 2167%–posted by 12 companies.

Those totals were comprised of three categories of pass-through mortgage-backed securities: those issued or guaranteed by the government national mortgage association, better known as Ginnie Mae; those issued by the federal national mortgage association, better known as Fannie Mae, and the federal home loan mortgage corporation, known as Freddie Mac, or Veterans Affairs; and, all others.

The top 50 were culled using the GNMA category as a base factor and adding the other categories as additional factors.

The GNMA pass-through holdings for these companies grew 25%; the FNMA and FHLMC holdings by 38%; and, the ‘all others’ category, by 248%. However, the ‘all others’ category was calculated off a much smaller base of $3.7 billion.

The second category of mortgage-backed securities–collateralized mortgage obligations and real estate mortgage investment conduits–declined 7% to $178.7 billion in 2004 from $192.9 billion in 2003 for the top 50 insurers.

While there was a 2% increase for insurer holdings issued or guaranteed by GNMA, FNMA, FHLMC or VA, there was a 64% decline for those securities issued by non-U.S. government issuers and then collateralized by mortgage-backed securities issued or guaranteed by government agencies.

Arthur Fliegelman, an analyst with Moody’s Investors Service, New York, notes that MBS product has been difficult to come by and that spreads have been “close to historical lows.” However, credit quality is pretty good, he continues.

Credit quality is important because companies are not going to take risk and sacrifice quality given tight spreads that are being offered, according to Scott Robinson, an analyst with Moody’s life insurance group.

For the top 50 in other real estate investment categories, mortgage loans experienced a 9% increase in 2004 over 2003, a change from the 49% decline in 2003 over 2002. Overall, the category represents 2.2% of the top 50′s gross investment holdings.

Real estate investments were down 2% in 2004 compared with 2003 following a decline of 14% in 2003 over 2002. However, according to data on the top 50 life insurers, this category represents only 0.59% of these companies’ total gross investment holdings.


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