OCC: Banks Face Risk From Mortgage Spread

National banks have been loading up on mortgage loans and securities over the past few years and they could get into trouble as interest rates rise, according to the Office of the Comptroller of the Currency.

"A number of banks have chased yields in their investment portfolios" by purchasing residential mortgage assets, OCC says in an advisory.

With the Federal Reserve increasing interest rates, the effective life of these assets could be extended and reduce the bank's earnings going forward.

"In particular, we are concerned that some banks have locked in a disproportionate volume of their assets at the cyclical low in yields, and may have turned an earnings event into a capital event," deputy comptroller Kathryn Dick said.

OCC also is concerned some banks have been using Federal Home Loan Bank advances with embedded options to finance their mortgage purchases that could also work against them in a rising interest environment.

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