Nonbank Lenders: Weathering Their First Interest Rate Storm

The Wall Street Journal reports that, due to the Fed raising interest rates, nonbank lenders of mortgages, auto loans and consumer lending have seen their costs of funds quadruple this year. As many of these firms came into business during the low-interest environment of the past decade, a rising interest rate environment will test many nonbanks’ business models for the first time. Higher interest rates may also impact ABS and MBS issuance, which have seen lower volumes and increased spreads as investors demand higher ABS and MBS yields, particularly as returns on Treasuries and corporate bonds become relatively more attractive. Given the strong historical performance of ABS, some investors see current market spreads levels as a buying opportunity for certain ABS products.

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