While most structured finance should withstand the effects of a rate rise courtesy of the Federal Reserve, faster increases could threaten to shock markets for commercial and residential mortgage-backed securities, according to a report from Fitch Ratings.
The report found that the CMBS market was most susceptible to negative effects from a fast rate rise through 2016 due to an upcoming maturity wall. Roughly $117 billion of transactions will mature between 2015 and 2018, right when the rate rise would gain steam.
Consequently, rate increases would diminish loan proceeds. At the same time, demands for more equity would likely fall on deaf ears, considering how overly leveraged many of these loans already are, leaving many prone to refinancing risk.
Although less of a risk generally, RMBS would still carry some concerns in the fallout of a rate rise, the Fitch report found. Pools with more adjustable-rate mortgages could face higher payments in the wake of an interest rate increase, for starters.
"A rise in rates and an economic slowdown would also likely affect home prices, adding negative pressure on legacy borrowers with little or no home equity," Fitch said in a news release for the report.
Fitch added, however, that post-2010 RMBS transactions should weather the rate rise better than their predecessors because of "strong home equity positions and large liquid reserves."
The report also noted that the impact on other asset-backed securities, such as auto and student loans, would be smaller, in part, because ratings volatility would be relatively low.
The Fitch report based its considerations on a scenario in which inflation rose to 4.5%, forcing the Fed to target 4% in 2016. Fitch said in reality it expected the Fed to target a policy rate of 1.6% then.
