Top Wall Street Banks to Take Paper Losses of $17 Billion in Mortgage-Backed Securities

The headquarters of JPMorgan Chase rises over Park Avenue in New York City, on July 13, 2012. (John Moore/Getty Images)

Rising mortgage rates are forcing big banks to write down losses on their mortgage-backed securities (MBS) amid the Federal Reserve’s tightening interest rate policy and regulations.

An MBS is an investment product that bundles home loans and other real estate debts, which then are bought from the banks that issued them. Wall Street’s big four banks—JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup—have been forced to acknowledge $17 billion in unrealized losses by writing down the value of MBS on their balance sheet, according to a Bloomberg report that analyzed company filings.

The unrealized losses do not appear on income statements of these firms. But the presence of such unrealized losses on balance sheets affects the accumulated other comprehensive income (AOCI) reported in the equity section. Changes in AOCI can impact the equity of shareholders.

Mortgage interest rates and an MBS have an inverse relationship. As mortgage rates rise, the value of an MBS goes down and vice versa.

According to data from mortgage lender Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage rose from 3.10 percent for the week ended Nov. 17, 2021, to 6.61 percent for the week ended Nov. 16, 2022.

During the same time, the S&P U.S. Mortgage-Backed Securities Index has fallen by more than 12 percent. As such, entities that invest in such asset-backed securities may have had to register losses, depending on the MBS they held.

Fed Policy, Application Decline

The MBS portfolio of banks has been negatively affected by the Federal Reserve’s policy of raising interest rates in its bid to control inflation. Higher Fed rates push up mortgage rates, which ends up affecting the value of an MBS.

The Fed’s benchmark interest rate, which was only 0.25 percent at the beginning of the year, surged above 3 percent by October, coinciding with the drop in value of the S&P U.S. Mortgage-Backed Securities Index.

In addition, the banks have also been dealing with higher regulatory requirements, new accounting rules which mandate higher reserves, and so on.

“The banks, in general, are taking the necessary actions to maintain sound financial profiles amid a deteriorating economic backdrop despite these headwinds,” Julie Solar, who tracks North American financial institutions at Fitch Ratings, told Bloomberg.

Still, it’s likely that “share repurchases will be curtailed or continue to be suspended as the banks meet their capital requirements.”

Meanwhile, demand for mortgages is dropping due to high mortgage rates. The mortgage loan-application volume for purchases was close to its 2015 lows for the week ended Nov. 4, according to data from the Mortgage Bankers Association. The refinance index was at its lowest level since August 2000.