Independent Banker - May 2021 - 34

PORTFOLIO PORTFOLIO MANAGEMENT
Cash flow or no?
Prepayments on MBS can be a DIY proposition.
By Jim Reber, ICBA Securities
H
ave we entered a new
trading range for investment
yields? That's the subject of great
conversation among market
participants, Federal Reserve and
Treasury offi cials, community
bankers and investment brokers.
What appears fairly clear, though,
is that we have more yield in the
intermediate- to long-term than
most people thought we'd have at the
start of 2021.
This brings up several other
topics of import for community
bank portfolio managers. One of
which is that since longer rates
have risen, they could either
decline or rise from here; at the
start of the year, " rates up " was
the only plausible option. And if
2020 taught investors in mortgagebacked
securities (MBS) anything,
it's that the cash fl ows from them
can be hugely unpredictable.
Prepayments from refi nancing set
all kinds of records this past year,
in many cases sending community
bankers scrambling to stay invested
while having to constantly adjust
their portfolios' book yields and
eff ective durations.
What we've learned
More recently, in what seems to me
as a triumph of capitalism, mortgage
underwriters and broker-dealers
have gotten much more granular
in providing details that underpin
MBS pools.
For example, borrowers' FICO
(credit) scores, average loan balance,
loan ages, geographic dispersion,
loan servicer and even the originator
can have an impact on the propensity
for the collateral loans to prepay
either faster or slower than average.
This is not a minor consideration
for community bankers. The
majority of bonds owned by the
industry are related to mortgages,
and by far most of them are single32
Q ICBA Independent Banker Q May 2021
Photo by Cactus Creative Studio/Stocksy

Independent Banker - May 2021

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