Rising interest rates could force shift towards riskier mortgages

With interest rates poised to rise, lenders and investors in the nation’s $6.8 trillion mortgage-backed securities market will be exposed to significantly more risk, according to a new report from Fitch Ratings. The agency said yesterday that rates are likely to rise over the next several years as a result of record levels of U.S. debt and the beginnings of an upswing in 10-year Treasury yields. For investors in MBS, that means “heightened price volatility, particularly [for] those that are highly leveraged, fund through repo markets, or mark-to-market their holdings,” Fitch said. In addition, fewer Americans would be able to afford homes, leading to a proliferation of floating rate and hybrid adjustable-rate mortgages and a shift away from the popular 30-year fixed-rate mortgage. In effect, Fitch said, this would “transfer interest rate risk from lenders to borrowers, running contrary to the current public policy focus on mortgage product simplicity and consumer protection.” TRD