U.S. bonds outstanding have grown from $2.5 trillion in 1980 to $36.9 trillion in 2011. Over this period mortgage-related and asset-backed securities accounted for much of this increase. According to Chart 1, the amount of mortgage-related and asset-backed securities outstanding grew from $0.1 trillion in 1980 to $10.2 trillion by 2011. The growth in mortgage-related and asset-backed securities exceeded the increase in other U.S. bonds. As a result, their share of the total U.S. bond market expanded during this period. Chart 2 shows that mortgage-related and asset-backed securities represented 4.4% of U.S. bonds outstanding in 1980. By 2007, they accounted for 34.5% of outstanding U.S. bonds. Since 2007, the share of the U.S. bond market that is attributable to mortgage-related and asset-backed securities has declined 6.9 percentage points to 27.6%. While the amount of mortgage-related and asset-backed securities outstanding continued to grow between 2007 and 2011, the amount of U.S. Treasury securities and corporate debt outstanding has risen even faster. However, despite a drop in its share between 2007 and 2011, the value of outstanding asset-backed and mortgage-related securities exceeds that of every other category.
Between 1980 and 2007, mortgage-related and asset-backed securities accounted for the majority of growth in the U.S. bond market. Mortgage-related securities include both mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). Like MBS, CMOs pay investors from cash flow generated by its underlying collateral. Unlike MBS, one CMO can offer a menu of payment options for investors with different risk-return appetites. Chart 3 shows that the value of mortgage-related securities outstanding as a share of the total U.S. bond market grew from 4.4% in 1980 to 21.9% in 1993. By 2007, its share of outstanding U.S. bonds had increased to 25.3%. Since 2007, the share of outstanding U.S. bonds represented by mortgage-related securities has fallen 2.7 percentage points to 22.6%. Meanwhile, the share of asset-backed securities outstanding, which was 0.2% of total U.S. bonds outstanding in 1986, grew to 9.2% by 2007. However, since 2007, its share has decreased 4.2 percentage points to 4.9%.
Household debt products underlie the majority of outstanding mortgage-related and asset-backed securities. Residential mortgage-related securities include both agency MBS and CMOs as well as both private label Residential MBS (RMBS) and CMOs. It excludes private label Commercial MBS (CMBS). Consumer financial asset-backed securities are linked to credit cards, auto loans, home equity loans, and student loans. According to Chart 3, 17.4 of the 17.5 percentage point expansion in mortgage-related securities between 1980 and 1993 were attributable to residential mortgage-related securities. Although its share of mortgage-related securities fell slightly, it still accounted for 91.6% of mortgage-related securities outstanding in 2011. At the same time, the outstanding amount of asset-backed securities that were based on consumer financial products accounted for 5.5 percentage points of the 9.2 percentage point growth between 1987 and 2007. By 2011, asset-backed securities based on consumer financial products represented 56.8% of all asset-backed securities outstanding. Meanwhile, collateralized debt obligations (CDOs) accounted for 37.4% in 2011.
As Chart 4 illustrates, home equity linked debt and CDOs were the primary drivers behind the growth in asset-backed securitizations between 1985 and 2011. The Securities Industry and Financial Markets Association notes that the inclusion of home equity in asset-backed security totals instead of mortgage-related totals is based on the market’s classification. Similar to other asset-backed securities, CDOs pay investors from cash flow generated by its underlying collateral. Unlike other asset-backed securities, the underlying collateral of a CDO can be composed of various assets and even other derivatives. However, according to Figure 2 of research from the Federal Reserve Bank of Philadelphia, home equity accounted for nearly 70.0% of the CDO balance in 2007 and other, non-commercial mortgage backed securities accounted for roughly another 10.0%.
In 1985, asset-backed securities were solely linked to automobile loans and equipment loans. However, by 1999, home equity-backed securities accounted for the largest portion of outstanding asset-backed securities at 34.8%. CDOs meanwhile, accounted for 14.3%. By 2006, home equity-backed securities outstanding peaked at 39.8% and the combination of home equity-backed securities and CDOs represented 69.3% of the market. The combined share of home equity-backed securities and CDOs climbed to 69.9% in 2007 as the decline in home equity-backed securities was offset by continued growth in CDOs. Meanwhile, structured securities backed by automobile loans fell from 93.6% in 1986 to 6.1% in 2007 while those linked to credit card loans, which rose to 55.6% of outstanding asset-backed securities in 1990, represented 10.9% of this market by 2007. Since 2006, the share of outstanding asset-backed securities linked to home equity has declined by 12.3 percentage points to 27.5%. Over this six-year period, the outstanding amount of other asset-backed securities, especially CDOs also fell, but the outstanding amount linked to home equity declined more quickly. However, at its 2012 level, securitizations of home equity-backed securities and CDOs, the two largest categories of outstanding asset-backed securities, account for 63.3% of outstanding asset-backed securities while at 13.7%, student loans are a distant third.