Flat Curve Deters Banks from Making Mortgage Investments.

Washington -- Commercial banks and thrifts abruptly stopped adding single-family loans and mortgage-backed securities to their portfolios in the fourth quarter in response to rising short-term interest rates and a flattening yield curve.

The Federal Deposit Insurance Corp. also reported last week that borrowings against home-equity lines of credit actually declined at commercial banks in the fourth quarter for the first time in five-and-a-half years.

FDIC-insured institutions increased their holdings of one-to-four family loans by $6.7 billion in the fourth quarter, after adding $150.1 billion in one-to-fours to their balance sheets over the previous three quarters. This slowed the annual rate of growth in one-to-four family assets to 11.4% in 2005 from 14% in 2004.

However, the annual rate of growth of their MBS assets slowed to 2.3% in 2005 from 13.1% in 2004. Banks and thrifts added less than $1 billion in mortgage securities to their portfolios in the fourth quarter and ended the year with $1.14 trillion in MBS.

Banking consultant Bert Ely noted that a flattening yield curve has forced banks to sell MBS, particularly if those purchases were financed with Federal Home Loan Bank advances or other borrowings. "As rates go up, people liquidate those positions," he said.

The consultant based in Alexandria, Va., also noted that borrowers are rolling home-equity ...