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Introduction

This brief assesses the extent of the current problems and the future for investing in these securities. Please note: This brief does NOT discuss MBS pricing or estimate future MBS asset values.

Scope

Sizes the historic MBS market by issuance through 2006 in the US, Europe, the UK and Australia, and presents the size of worldwide exposure to US MBS

Assesses MBS exposure on a company level by identifying the MBS balance sheet exposure for 38 of the world's largest banks in the US, Europe and Asia

Highlights

While agency securities have traditionally accounted for the majority of MBS issued, its share has dropped from around three quarters in 1996 to under half by 2006. Private label MBS issuance accounted for $743 billion in 2006 and was the fastest growing issuance sector in the last three years.

Although Australia was the third largest single country to issue securitized assets in 2006, issuing $102 billion of these assets (90% of which, or $90 billion are MBS), the structure of its market should ensure that it won't face the same sub-prime issues that the US is seeing.

European-based banks reported almost $300 billion in MBS on their balance sheets as of the end of 2006. This equates to almost three-and-a-half times the total profits reported in 2006 by the same banks. It would take write-downs of 29% on average across these balance sheets to equal the total profits reported by the banks in 2006.

Reasons to Purchase

Assess the scope of MBS issuance historically in the US, Europe, the UK and Australia.

Analyze which regions have the most exposure to mortgage-backed securities based on balance sheet analysis of 38 of the worlds largest banks.

Identify which banks have large reported MBS exposures

DATAMONITOR VIEW 2
CATALYST 2
SUMMARY 2
ANALYSIS 3
The US, Europe and Asia have embraced RMBS; as a result, at least $6.6 trillion in RMBS sit on balance sheets around the world 3
The US issued $1.934 billion in MBS securities in 2006, making it the largest single country issuer in the world 3
Balance sheets worldwide have $5.8 trillion in exposure to US RMBS 6
Europe has seen a dramatic increase in securitized asset issuance in the past four years 7
The UK is Europe's largest issuer of RMBS, with strong growth in issuance in the last four years 9
The European MBS market is only 20% the size of the US MBS market 10
MBS coming from Australia are relatively healthy for a number of structural reasons 10
The problem is that nobody knows who holds the defaulting securities, or where their valuations may end up 13
In the short-term, there will be a lot of upheaval 13
The value of MBS reported in the balance sheets of 38 of the world's largest banks exceeded $1 trillion at the end of 2006 13
Asia Pacific banks will likely fare better than their peers in other parts of the world 13
US banks are facing a difficult year in 2008 14
At least $300 billion in MBS sat on European balance sheets as of December 2006 17
The worst is not over, but as a medium-term investment, the RMBS market is still an attractive one 19
MBS are a good investment for the right wealth management clients 19
APPENDIX 21
Definitions 21
Agency/GSE MBS 21
Collateralized debt obligations (CDOs) 21
CMBS 21
Fannie Mae (FNMA) 21
Freddie Mac (FHLMC) 21
Ginnie Mae (GNMA) 21
Mortgage-backed securities (MBS) 21
Private label MBS 21
RMBS 22
Securitization 22
Sub-prime 22
Methodology 22
Further reading 22
Ask the analyst 22
Datamonitor consulting 22
Disclaimer 23
List of Tables
Table 1: MBS issued in the US each year, ($bn) 5
Table 2: US Agency MBS outstanding, 1995-March 2007, ($bn) 7
Table 3: MBS issuance based on originating country or region (Europe), 1999-2006, ($bn) 8
Table 4: UK major banks' issuance of RMBS, (£bn) 10
Table 5: MBS issuance based on originating country or region (Australia), 1999-2006, ($bn) 12
Table 6: APAC-based bank MBS exposure accounted for 282% of the same companies' total profits in 2006 14
Table 7: North America-based bank MBS exposure accounted for 501% of the same companies' total profits in 2006 16
Table 8: Western Europe-based bank MBS exposure accounted for 344% of the same companies' total profits in 2006 18
List of Figures
Figure 1: US MBS issuance has been relatively steady over the last three years following a three-year boom in issuance 4
Figure 2: Agency MBS outstanding balances have grown strongly in the US from 1995 to March 2007 6
Figure 3: European securitization has grown dramatically since 2003 8
Figure 4: The UK market for RMBS has grown substantially in recent years, 1999-2006 9
Figure 5: Australia's MBS issuance is much smaller than that of Europe or the US, but has grown strongly since 2000 11