Fitch: Flatter Curve Could Offset Rate Impact on U.S. Housing

Fitch Ratings, New York, said a flattening yield curve could be a potential catalyst for credit expansion and improving mortgage availability in the U.S.  

Fitch said a flattening yield curve–assuming tightening by the Federal Reserve is offset on the long end by accommodative monetary policy elsewhere and investors’ search for yield–could increase incentives for banks to securitize non-agency mortgages and partially offset the impact of higher rates on volumes. Fitch’s Global Economic Outlook forecasts consistent GDP growth of 2.3-2.5 percent and a flattening yield curve.  

Fitch Director Britton Costa said banks have typically been holding non-agency mortgage originations on their balance sheets. “However, should the net interest margin narrow and retaining mortgages become less profitable, banks may be incentivized to generate earnings by focusing on turnover and fees, leading to the restarting of non-agency securitizations,” he said. “This expansion could offset volume declines from higher rates, specifically in terms of refinancings.”  

Costa said Fitch assumes three 25-basis point hikes in the Fed Funds rate through 2016, taking the rate to 1.25 percent by the end of 2016. The prospect of policy divergence around the world has had an impact on the U.S. dollar and, when combined with investors’ search for yield, could cause the yield curve to flatten through 2017,” he said.  

Fitch also expects single-family home prices could end 2016 near record highs with another year of mid-single-digit growth. While the symbolism of surpassing the prior peak could cause consternation in the market, national home prices generally appear sustainable compared with long-term equilibrium values based on underlying economic fundamentals, Fitch said.  

“While we have stable outlooks for both U.S. home builders and U.S. [residential mortgage-backed securities in 2016, there could be positive outlooks and upgrades for builders and legacy RMBS securitizations if the recovery performs as expected or better,” Costa said.