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This document is intended for BofA Securities institutional investors only. It may not be distributed to financial advisors, retail clients or retail prospects.
BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Key takeaways
- RMBS spreads fair/slightly cheap, recommend floaters: Jumbo 6cap 160bps = 75 bps pickup vs Corp IG and 50bps vs Agency.
- Policy tailwinds for Banks with BASEL III to encourage mortgage lending, reduce RWA. NAIC boost insurance resi purchase
- Bank closed-end resi holdings $2.23T, unchanged YTD. CUs jr liens holdings up $3bn QoQ $23bn YoY, exceeding banks at $9bn YoY
We provide a factbook that includes issuance, spreads, performance, collateral characteristics, and other details across sectors. Please refer to our weekly factbook link here for details.
Market Overview:
Issuance for the week was around $5bn, YTD at $99bn. Spreads tightened 5bps for NQM across the stack with Non-QM AAAs now at 120bps, HELOC/CES at 125bps, Jumbo 2.0 PT at 140bps with 6 cap floaters around 155-160bps.
We looming uncertainty and a 10y yield that just peaked above 4.5%, we recommend looking at floaters. CLO AAA spreads at 120bps for new issue and 155-160bps for 6% cap Jumbo 2.0 PLS floaters offer meaningful pickup vs corporate fixed-rate IG at 70-75 bps.
Bank Holdings as of 2026Q1
US banks residential real estate loan holdings is at $2.67tn as of May 2026. Credit Union junior lien holdings increased by about $3bn QoQ. Credit Unions junior lien holdings increased by $23bn YoY compared to an increase of $9bn YoY for banks, demonstrating increased interest in junior liens.
Important activities for the quarter include (a) Huntington acquired Cadence in Q1 2026, leading to significant increases/decreases to their resi balance sheet, (b) JPMorgan securitized away their 2nd liens acquired from Discovery as mentioned previously (c) Fifth Third bank acquired Comerica, which increased the C&I loans significantly of the former, and reduced the latter.
We review current bank holdings and QoQ changes in bank holdings for various asset classes in this report.
Basel III RWA Updates Effecting Banks:
The Basel III changes proposed in March are nearing the end of its comment period, which is in June. The Fed estimates that these proposals will lead to CET1 ratios declining by 4% for the large GSIBs. It further estimated that under its standard risk-based approach, lending capacity could increase by $1.2 trillion. Overall this is beneficial to bank origination, holding, and purchasing of MBS and residential loans. Details below.
NAIC RMC Changes for Trusts Could Boost Resi Purchases
The NAIC has implemented a proposal that could unlock additional residential mortgage investments for insurance companies. The NAIC rule will state that insurance companies' investments in unaffiliated trusts also receive the same 68bps RBC charge as whole loan investments, provided underlying mortgages were in good standing. It is easier to invest in Unaffiliated trusts, thus the potential for more Insurance investment in resi loans.
Please email us for a copy of bank holdings
Market Overview
Non-Agency Spreads Currently Slightly Cheap to Fair, Recommend Floaters
Issuance for the week was around $5bn, YTD at $99bn. Spreads tightened 5bps for NQM across the stack with Non-QM AAAs now at 120bps, HELOC/CES at 125bps, Jumbo 2.0 PT at 140bps with 6 cap floaters around 155-160bps.
Agency Eligible 6-cap floaters widened after tights last week back to around 155-160bps, and still present a good relative value compared to CMO floaters. For more details see the sections "Floating Through Turbulent Straights" below.
Floating Through Turbulent Straights
10yr rates breached 4.5% this week and at 4.58% as of the time of this publication. Our Rates strategists are calling it the NACHO (Not A Chance Hormuz Opens). Expectation is for long commodity supply disruption, plus headwinds in U.S. Inflation as shown in this week's data. Hike risk is likely underpriced and our strategists recommend shorting the 2yr part of the curve. For more details see BofA's Global Rates Weekly.
If one feels whipsawed by rate vol, we recommend looking at floaters. Both CLO and RMBS market offers those options - in plenty particularly in US BSL CLOs. It is the one safe harbor which allows investors to sail through the turbulence in Hormuz waters. CLO AAA spreads at 120bps for new issue and 155-160bps for 6% cap Jumbo 2.0 PLS floaters offer meaningful pickup vs corporate fixed-rate IG at 70-75 bps.
Typically backed by prime jumbo collateral or Agency Investor loans, Jumbo 2.0 bonds can offer a similar cashflow profile and AAA ratings to Agency, but with meaningfully wider DMs than CMO floaters with comparable caps.
Moreover, technical distortions have further contributed to the persistence of the gap. Non-Agency floaters, even at the AAA level, may face a more limited bank bid and wider liquidity premium - PLS floaters don't count towards LCR while CMO floaters do. Furthermore, fast money accounts who rely on repo fundings may prefer CMO floaters due to their lower funding costs and more favorable haircuts.
Agency Model valuation
The cheapness is further supported by the model valuation run. Yield Book shows non-Agency floaters backed by Agency investor loans trading 30 - 40bps wider in OAS than comparable Agency CMO floaters, while jumbo-backed floaters screen 10 - 20bps wider.
Meanwhile, our one-year total return analysis suggests that Agency investor loan-backed floaters offer better, or at least comparable, projected returns versus Agency CMO floaters across all scenarios. By contrast, jumbo-backed floaters underperform in larger sell-off scenarios, reflecting their greater duration extension risk.
That said, we note that the smaller market size and weaker liquidity of non-Agency bonds may lead model-projected returns to be overstated, particularly if exit spreads are wider than assumed or transaction costs prove higher than modeled.
For investors with a longer holding horizon, the yield analysis suggests that Agency investor loan-backed floaters screen more favorably in rally scenarios, showing from higher yields and longer WALs due to the call protection embedded in investor loan collateral. The 6.5% cap floater also outperforms in moderate sell-off scenarios up to roughly 150bp.
By contrast, while jumbo-backed floaters also offer higher yields in rallies and comparable yields in sell-offs, their WALs can vary drastically across rate scenarios. This underscores the more meaningful convexity risk associated with jumbo collateral.
Within the PLS floater universe, we prefer investor collateral-backed floaters over jumbo-backed floaters, as they show more stable performance across rate scenarios.
We acknowledge, however, that PLS floaters generally come with weaker liquidity and higher funding costs than Agency bonds. As such, we view them as a compelling spread-add opportunity for accounts with stronger holding power, stable funding sources, and the ability to absorb weaker secondary-market liquidity.
The House is saving the house
This week the House of Representatives prepared its version of the ROAD to Housing act, which was passed by the Senate in March, with some modifiers. In particular the House version removes the 7 year holding period requirement that was present in the Senate version. This clause in the Senate version would have dented any investment in the BTR segment. The House version excludes from its definition of a single family, multiple built on a single parcel. That should remove any uncertainty for built to rent developers.
The House version does prevent institutional investors from buying existing homes that have been owned for at least 1 year - that would arguably allow fix & flip entities to sell properties provided they are not breaching the 1yr ownership limit.
The Bill will be voted by the Congress next week and it remains to be seen if there will be further changes. For our discussion on the prior version of the Senate's bill please see our previous March 13 publication containing (see report) analysis on the policy update.
Bank Holdings as of 2026Q1
US banks residential real estate loan holdings is at $2.67tn as of May 2026.
Important activities for the quarter include:
- Huntington acquired Cadence in Q1 2026, leading to significant increases/decreases to their resi balance sheet.
- JPMorgan securitized away their 2nd liens acquired from Discovery as mentioned previously
- Fifth Third bank acquired Comerica, which increased the C&I loans significantly of the former, and reduced the latter
We are making available our detailed bank holdings file that tracks holdings of loans and securities across Banks and changes QoQ. Please email us for a copy.
- Total Deposits: JPMorgan Chase ($2,788.0bn) and Wells Fargo ($1,517.0bn) are the largest bank in terms of deposits as of Q1 2026. The largest deposits increases where JPMorgan and BNY Mellon by 90.2bn and 87.2bn respectively. The largest decreases were Commercia and Cadence by -66.3bn and -44.1bn respectively.
- Total Loans: JPMorgan Chase ($1,519.7bn) and Wells Fargo ($985.4bn) are the largest bank in terms of deposits as of Q1 2026. The largest loan increases were Fifth-Third and Pinnacle by 54.2bn and 46.2bn respectively. The deposit decreases were Commercia and Cadence by -50.9bn and -37.5bn respectively.
- HELOCs: PNC ($21.9bn) and Citizens ($19.3bn)are the largest bank in terms of HELOC holdings as of Q1 2026. The largest HELOC increases where Fifth-Third and Pinnacle by 1.9bn and 1.8bn respectively. The largest decreases were Commercia and Cadence by -1.9bn and -1.3bn respectively.
- Closed End 2nd liens: US Bank ($2.9bn) and JPMorgan ($2.4bn) are the largest bank in terms of 2nd Lien holdings as of Q1 2026. The largest 2nd Lien increases were Woodforest and Huntington National by 320mm and 203mm respectively. The largest decreases were JPMorgan and Cadence by -7400mm and -179mm respectively.
- Non-Agency RMBS: JPMorgan Chase ($12.7bn) and Ameriprise FSB ($7.3bn) are the largest bank in terms of RMBS holdings as of Q1 2026. The largest RMBS increases were Burke & Herbet & Trust and Nicolet National by 158mm and 98mm respectively. The largest decreases were JPMorgan and Ameriprise FSB by -769mm and -747mm respectively.
- ARM Loans: JPMorgan Chase (143.2bn) and Wells Fargo ($69.6bn) are the largest bank in terms of ARM holdings as of Q1 2026. The largest ARM increases were Huntington National and US Bank by 5,463mm and 1,727mm respectively. The largest decreases were Cadence and Comercia by -6,139mm and -1,510mm respectively.
- C&I loans: JPMorgan Chase (314.2bn) and Wells Fargo ($198.5bn) are the largest bank in terms of C&I holdings as of Q1 2026. The largest C&I increases were Fifth Third and JPMorgan by 26.5bn and 14.7bn respectively. The largest decreases were Comercia and Cadence by -24.5bn and -7.9bn respectively.
- Residential Loans: JPMorgan Chase (307.8bn) and Wells Fargo ($223.1bn) are the largest bank in terms of residential loan holdings as of Q1 2026. The largest resi increases were Huntington National and Pinnacle by 9.7bn and 5.3bn respectively. The largest decreases were Cadence and JPMorgan by -10.8bn and -10.2bn respectively.
Bank portfolio holdings:
Holdings changes
*Due to acquisition activity for Commercia, Cadence, and Fifth-Third, we have removed them from the below graphs to make it more readable
Credit Unions:
According to 2026Q1 bank filing data, Credit Union junior lien holdings increased by about $3bn QoQ. Navy Federal Credit Union is the largest holder at about $8.9bn of junior lien holdings, and it increased its holdings by about $1.6bn YoY. Digital Federal CU added the most ($1.6bn) this quarter, while First Technology Federal CU cut its junior lien holdings the most this quarter.
Further, Credit Unions junior lien holdings increased by $23bn YoY compared to an increase of $9bn YoY for banks, demonstrating increased interest in junior liens.
NDFI vs C&I
NDFI lending currently is at $2trillion - vs C&I loans at $2.9 trillion. Moreover, NDFI lending has grown consistently at a pace of 17% each year (vs 4.5% for C&I loans) since 2015 and represents a low RWA, high ROE form of business for banks. For instance, loans to Business credit intermediaries - namely private credit funds and/or leveraged loan warehouses typically have a 20% RWA vs C&I loans with a 100% RWA. These lending lines foster other businesses for the bank as well.
Since 2024Q4, Banks started to delineate lending to NDFIs into
(a) Mortgage credit (REIT lending, mortgage warehouses)
(b) Businesses - including private credit funding, loan warehouses & CLOs bought in the loan format
(c) Consumer Credit
(d) Private Equity - including NAV and subscription finance loans
(e) other loans to financial institutions. See below for a detailed explanation of these types. Please see Banks: Weekly Teller: Reviewing new disclosure on loans to private credit 18 February 2025 for details.
Total NDFI lending stood at $2 trillion currently. Of the large banks that reported ($1.6tn loans to NDFIs), we estimate about 27% of that is to private credit and loan warehouses, and 24% to Private Equity businesses.
Thus, 51% of the $1.6 trillion NDFI lending market is primarily towards either Private Credit and/or Private Equity including CLO loan warehouses.
CLO tranches in the loan format, BSL loan warehouses (for eventual CLO issuance) are included in lending to Business Credit intermediaries. We estimate those to be around $100bn. Thus, Bank lending to pure Private Credit asset managers is estimated to be around $300bn.
Basel III RWA Changes
Reduced RWA for Mortgages and RMBS Could See More Bank Activity
The Basel III changes proposed in March are nearing the end of its comment period, which is in June. The Fed estimates that these proposals will lead to CET1 ratios declining by 4% for the large GSIBs. It further estimated that under its standard risk-based approach, lending capacity could increase by $1.2 trillion. The areas impacted are highlighted below
SRT: The proposal may adversely affect SRT issuance due to underlying asset RWAs and lower CET1 requirements.
Mortgages - LTV based grid: Risk weights go from a flat 50% RWA to a LTV based grid: 20%, 25% and 30% for <50, 50-60, and 60-80 LTV loans respectively. Investor mortgage RWAs go to 30-45% (<80LTV) from a flat 100% currently. Credit is also given to declining loan balances due to amortization/curtailments (vs LTV being calculated at origination in the current process). Thus, RWAs will decline as mortgages amortize.
Mortgage servicing: Risk weights at 250%. The 10% threshold has been eliminated.
This should increase bank share in both low LTV and investor mortgages => less supply in both GSEs & Pvt label markets. Banks may be more willing to refi low LTV conventional mortgages due to lower RWAs (30% for 60-80 LTV). Banks have a low share of conventional lending now so could see some room for growth.
Commercial Real Estate: Expanded risk based approach - LTV based (70% for <=60 LTV, 90% for 70-90% LTV, 110% for >90% LTV). For smaller banks under the standardized approach, it reduces to 95%.
Retail & Consumer loans: Expanded-approach sees Non-Transactor loans reduced to 75%, and transactor to 45% with RWAs for unused portion. Standard approach: 90%
Corporate exposure: From 100% RWA, under the expanded framework, IG loans receive 65% RWA, others 100% RWA. Standardized approach: 90% RWA for all.
Securitization: Minimum risk weights go from 20% to 15%. P-factor remains at 0.5 (vs 1 in the initial proposal made in 2023). This is a positive for all securitized product AAAs given lower RWAs at 15% vs 20% currently.
SRT: The proposal may adversely affect SRT issuance due to underlying asset RWAs and lower CET1 requirements.
Banks now only originate roughly 25% of conventional, and 5% of government loans. Simultaneously they have also increased their presence in Prime Jumbo loans. It is also important to note that while these changes are made to stimulate lending in the housing market, they are likely to do so only at the lower LTV buckets.
For more information on Basel III, please see our Mar 20 Non-Agency RMBS Weekly linked here.
NAIC Insurance RMBS Changes
NAIC RBC Charge for Mortgages Could Unlock Significant Insurance Investments
Last week we highlighted the change NAIC has made to its RBC computation for insurance company investments in mortgages via unaffiliated trusts. We re-iterate the points below with two additional highlights:
MTM vol for unaffiliated trusts:
Investments in unaffiliated trusts are subject to MTM risks as unlike mortgage loans recorded at amortized cost, fund interests are recorded at NAV.
FHLB pledging:
Resi whole loans can be pledged to the FHLB which boosts their return profile for insurance companies. One of the largest accounts to use FHLB lending is an insurance account which is also the biggest holder of residential mortgage loans. The insurance firm has borrowed $23bn from the FHLB, and pledged $45bn of collateral (according to data from S&P). Of the $45bn of collateral pledged, resi mortgage loans account for around $26bn and CRE loans another $12bn. Thus, resi mortgage loans (held on balance sheet) can provide an attractive source of borrowing base for life insurance.
It is not clear to us if interests in Unaffiliated trusts however could be pledged to the FHLB due to perfection and security lien related issues. Having said that, the reporting requirements for insurance firms is a lot lower for unaffiliated trust investments and we think insurance investments in resi mortgage loans are set to increase furthermore from here.
Recap of our prior piece:
The NAIC has implemented a proposal that could unlock additional residential mortgage investments for insurance companies. The NAIC rule will state that insurance companies' investments in unaffiliated trusts also receive the same 68bps RBC charge as whole loan investments, provided underlying mortgages were in good standing. It is easier to invest in Unaffiliated trusts, thus the potential for more Insurance investment in resi loans.
Currently it is being discussed on how insurance companies will certify that residential loans are in good standing. Typically such trusts provide monthly reports on underlying portfolio of loans (similar to RMBS trusts) and could be used by insurance firms to establish the share of performing loans. The underlying loans in an unaffiliated trust won't be reported on an asset by asset level like it is done in Schedule B.
This would imply that asset managers can now set up trusts in which multiple insurance firms can own an interest, and this would enable them to have a similar RBC of 68bps vs owning outright the underlying mortgage investments. Since insurance firms need not be a 100% owner of any trust, this structure can enable asset managers to service several insurance firms via the creation of one trust and maintain the simplicity around a single-line reporting requirement (vs each asset level).
We think this could unlock a meaningful amount of insurance investments into residential loans since insurance firms currently own $150bn of resi loans vs $650bn of commercial real estate loans, and the top 10 insurance firms account for 85% of all resi investments. With over ~300 active insurance firms, we think the scale and potential for this asset class to grow within insurance is immense.
RMBS Spreads and Issuance
Latest spreads versus historic
Strongest start to Non-Agency issuance since GFC
Rating actions this week and YTD
Over the week (05/07/2026-05/14/2026), 66 RMBS bonds were upgraded across NA RMBS sectors. 1 bonds were upgraded from Non-IG to IG.
As of 2026 YTD, we estimate 2170 upgrades and 1 downgrade actions across all rating agencies. Among them, 247 Non-IG bonds were upgraded to IG, while 0 IG bonds got downgraded to Non-IG.
Acronym descriptions
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| Timestamp: 15 May 2026 08:31PM EDT |
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