Tokenization and MBS

“I’m not long your house anymore”

Mortgage-backed securities (MBS) are back in the headlines and the next financial crisis supposedly imminent. While the latter statement is debateable, one thing we know for sure is that understanding MBS and their role in the collapse of Silicon Valley Bank (SVB) can provide valuable insights into how tokenization can help prevent future banking crises. Learn how you can harness the full potential of the technology.The recent failure of Silicon Valley Bank (SVB) could have a lasting impact on mortgage-backed securities (MBS) markets.

According to Morgan Stanley analysts, the effect may not be on the securities that investors are most worried about.

The analysts suggest that even the safest corners of mortgage markets could see permanently lower valuations. This prediction sheds light on agency MBS markets and the way banks manage their balance sheets. The agency MBS markets, which involve mortgages on single-family homes and multi-family apartment buildings, are largely dominated by banks. As banks reduce their exposure to these markets, the impact will be felt by homeowners and investors.

After the run on SVB, banks may be forced to reduce their holdings of US-mortgage-backed securities that are guaranteed by Fannie Mae and Freddie Mac. These bonds have high duration and experience significant losses when interest rates rise. Therefore, banks may want to reduce their exposure to such securities, leading to a negative impact on agency MBS markets.

What are mortgage-backed securities?

MBS are formed through securitization, a financial method that involves consolidating diverse mortgage loans into a single pool. The cash flows generated by these mortgages are then divided into tranches, each with its own credit rating, which reflects the level of risk associated with that tranche. These tranches are subsequently transformed into tradable securities, known as MBS, allowing investors to buy and sell them in the financial markets as debt instruments, with varying degrees of risk and reward.

The global market for MBS is significant, but the US MBS market is one of the world's largest and most liquid fixed-income markets. Its outstanding securities total approximately €9.8 trillion. In contrast, the EU securitization market has a notional amount of around €0.7 trillion. This difference mainly reflects structural features of the US securitisation market.

MBS - as the downfall of SVB

In the last months the financial landscape became increasingly volatile, the latest incident involving SVB provides a cautionary example of the potential real estate-related risks in the current market. SVB, a prominent financial institution, invested in a $120 billion portfolio of highly rated government-backed securities, including $91 billion in fixed-rate mortgage bonds with an average interest rate of just 1.64%. However, when the US Federal Reserve started to raise rates, the value of the portfolio fell significantly, leaving SVB with an asset/liability mismatch. This was mainly due to the fact that the institution had invested in longer-term mortgage securities with maturities of more than 10 years.

This example is a striking illustration of the current market situations relevance, as the risks associated with rising interest rates become more apparent. With a massive $1.5 trillion wall of debt looming for US commercial properties alone, the market is exposed to substantial refinancing risks in the coming years. These potential disturbances could leave many institutions, not just SVB, vulnerable to financial setbacks.

In the face of increasing market volatility and the growing threat of refinancing risks, financial institutions, real estate investors and asset managers must not only closely monitor market trends but also adapt innovative digital solutions to effectively manage their portfolios. By leveraging cutting-edge technology and data-driven insights, these institutions can mitigate the potential impact of refinancing risks and asset/liability mismatches, ensuring greater stability and resilience in an uncertain economic landscape.

How tokenization helps to prevent future SVB’s?

The failure of Silicon Valley Bank has emphasized the importance of finding new solutions to prevent future banking crises. Tokenization offers a promising tool to create efficient and flexible investment structures, that help real estate investors, asset managers and mortgage banks to restructure their real estate investments. In addition the tokenization of mortgages and other real estate investment structures can help to increase overall market transparency and liquidity.

Tokenization involves the representation of mortgages or real estate as security tokens on the blockchain. Every security token has the capacity to integrate a wide-ranging dataset, safely stored on the blockchain, encompassing diverse types of information, including mortgage-related, legal, or property-related data.

The Benefits

Restructuring distressed assets

Tokenization offers a promising tool to create efficient and flexible investment structures, that help you to restructure various types of debt and investments. Security tokens themselves are highly flexible and can, if pooled together accordingly, possess similar characteristics as mortgage-backed securities (MBS). Digital alternatives, like these and others, offer the advantages of reduced administrative costs and tailored solutions that cater to your unique needs and demands. Moreover, they enable you to integrate adaptable exit strategies for both you and your partners right from the start in the form of fractional sales on a digital infrastructure.

Better pricing in times of distressed markets

Flexibility is an advantage that is always desirable, but it becomes even more critical during times of financial turbulence. This is particularly important because traditional investment structures today often have limitations that can worsen the situation. Additionally, geographical restrictions can limit your network to partners, who may also be experiencing similar financial challenges.

By digitizing your business through tokenization, you can more easily access new sales and distribution channels with lower minimum investments, enabling more investors to participate. In addition, tokenization helps you to break down geographical barriers by giving you more flexibility in terms of structures and partners, enabling you to expand your market reach. This presents an opportunity to mitigate the impact of currently unavoidable discounts under unfavorable market conditions.

Next level data transparency and utilization

Overall tokenization and especially the incorporation of investment and property-related data within each token enhances transparency, as it makes all data accessible for all your stakeholders such as investors, regulators, mortgage providers or PropTechs. This enables you to efficiently manage all your stakeholders in an automated and seamless manner, freeing up significant resources that are currently tied up in coordinating different stakeholders.

The on-chain data set in each token further facilitates risk classification, enabling rating agencies (and you) to identify and assess potential risks more effectively. The result are more accurate and transparent risk assessments (ratings), which help you to identify distressed assets.

More transparency also benefits the integration of PropTech-solutions in your exisiting process landscape, which has the potential to benefit you throughout the whole mortgage/asset life-cycle. Potential application fields are your risk management with improved identification of credit risk, and enhanced reporting capabilities (e.g. ESG-reportings) through better and facilitated utilization of data.

StegX as your tokenization guide

At, our main goal is to offer comprehensive assistance throughout the entire product life-cycle. Our one-stop-shop solution for real estate investments helps you unleash the full potential of tokenization, enabling you to accelerate all aspects of your business, from product structuring to global distribution, as well as finding new asset managers in a cross-border network of professionals.