A flattening yield curve is seen as one potential catalyst for credit expansion and improving mortgage availability in the US, according to a new report published by Fitch Ratings.We expect a flattening yield curve in the US, assuming tightening by the Federal Reserve is offset on the long end by accommodative monetary policy elsewhere and investors’ search for yield. The result 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, which forecasts consistent GDP growth of 2.3%-2.5% in the US and a flattening yield curve, underpins Fitch’s Stable Outlooks across housing related sectors (Homebuilders, Multifamily CMBS, Multifamily REITs and RMBS).Fitch assumes that there will be three 25-basis point hikes in the Fed Funds rate through 2016, taking the rate to 1.25% by the end of 2016. The prospect of policy divergence around the world has had an impact on the US dollar and, when combined with investors’ search for yield, could cause the yield curve to flatten through 2017.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. This expansion could offset volume declines from higher rates, specifically in terms of refinancings.Fitch also expects single-family home prices could end 2016 near all-time 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, according to Fitch’s Sustainable Home Price model.While we have Stable Outlooks for both US homebuilders and US RMBS in 2016, there could be positive outlooks and upgrades for builders and legacy RMBS securitizations if the recovery performs as expected or better.Conversely, there is more risk to downside at this point in the cycle for multifamily REITs. REIT credit metrics are not expected to improve further, supply is above average, capital values are at all-time highs and affordability metrics continue to deteriorate.
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