Some analysts and economists are beginning to predict an inversion of the yield curve in the first half of 1995. They are still in the minority, but most others agree that the curve will certainly flatten if not invert.

An inverted curve means simply that short-term rates will be higher than long-term rates. And this has substantial implications for competitors in the mortgage business.

"An inversion would be bad for portfolio lenders," said David Lereah, chief economist for the Mortgage Bankers Association. "Mortgage banks would have an advantage with their fixed-rate loans."

Mr. Lereah added, though, that he does not expect an inverted yield curve. "You'll get it only if the Fed keeps on pushing short-term rates up," he said.

Merrill Lynch & Co. is among the believers in the yield-curve inversion. In its Mortgage Choice, a monthly publication of the mortgage-backed securities research department, it says: "The only question in our minds is whether the inversion takes place in a higher, stable, or lower long-rate scenario."

As a result, it is expecting originations of adjustable-rate mortgages to drop significantly.

At Countrywide Credit Industries, chairman David Loeb believes that if an inversion occurs, it will be because of a rise in short-term rates and stability or a small decline in long-term rates.

"This will certainly change the mix of fixed-rate and ARM production," he said. "The total number of transactions may well go down because people needed the lower ARM rate to qualify."

He added that Countrywide's loan mix was already showing the effects of the recent flattening of the yield curve. "We were doing about 50% ARMs, then we went down to 40%. Now we're under 40%," he said.

Other mortgage banking companies, though, have had less success with ARMs, and a return to a fixed-rate market could be salutary.

One dissenter on the yield curve is Jonathan Gray, a securities analyst with Sanford C. Bernstein & Co., New York.

"Right now, the shape of the curve is very curious," he says. "It's very steep from three months to two years. From two years to 30 years it's very flat. It may move to a more normal configuration by flattening in the two- year to 30-year area."

Mr. Gray says the curve could invert briefly, but the inversion is unlikely to persist. "To have it persist, you need a recession," he says.

"It will be two years before we have a recession, and rates will peak at a higher point than most believe. The housing sector is not as sensitive to interest rates as it used to be, and you need a housing slump to have a recession."

He points out that the housing market has been remarkably resistant to rising rates. "People that were buying with 6.5% fixed mortgages are now buying with 6.5% adjustable," he said.

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