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The Institutional Risk Analyst

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Bank Book Q1 2024 Released; Biden Penalizes Consumers Who Refinance

Updated: Mar 11

"And what is good, Phaedrus,

And what is not good --

Need we ask anyone to tell us these things?"

Robert Pirsig

March 11, 2024 | Premium Service | We’ve released the new edition of The IRA Bank Book for Q1 2024. Suffice to say that the credit metrics that went sideways for most of 2022 and 2023 are now headed higher. Hockey stick in fact. Look for a coupon for the stand alone edition of The Bank Book at the end of this comment.

Autos and credit cards are above 2019 levels of net loss, but 1-4 family residential loans remain in negative net loss territory.  Yet even in housing, fatigue from inflation and a qualitative recession is showing up in rising delinquency among low FICO borrowers.

Source: MBA, FDIC

The divergence between high and low FICO cohorts among consumer lenders in credit cards, auto loans and yes even residential mortgages is profound and troubling. H/T to Mark Zandi at Moody's Analytics for being even more bearish than The IRA on consumer credit in Q4.  To be clear, the volume of loss is still low, but rising loss-given default (LGD) is a leading indicator of bad things to come in consumer credit. The chart below shows LGD for $550 billion in mostly prime bank auto loans.


Even as loss severities rose on prime auto loans in Q4 2023, the net loss for bank 1-4s went down in Q4, driving loss given default even deeper into negative territory. This is why falling interest rates will cause home prices to rise dramatically, contrary to the guidance from Senator Elizabeth Warren (D-MA).

But default rates for all FHA borrowers are now in double digits and the low FICO quartile is already mid-teens delinquency.

It is interesting to note that even as consumers struggle with inflation and a decidedly low quality economic scene, the Biden Administration is quietly telling lenders not to offer lower mortgage rates to consumers. Interest rates have rallied a point since November. Thirty-year fixed rate mortgages are being written below 7% today vs 8% at the peak in the third week of October last year. 

Despite what Joe Biden says about helping Americans with the soaring cost of housing, he is really protecting Black Rock (BK), Pimco and the Bank of China from prepayments on their mortgage backed securities (MBS). In fact, the Federal Housing Finance Agency, working on orders from the White House, is said to have directed the GSEs to penalize lenders who have too many prepayments in their portfolio.

Penalties imposed on some lenders by the GSEs are reportedly as high as 25bp on conventional loan pools. Ginnie Mae is also said to be considering penalties for lenders who are aggressively refinancing consumers and especially veterans into lower cost mortgages. If the Biden Administration cannot penalize consumers who seek lower mortgage costs, then we'll just impose penalties on lenders. And the lenders will pass the cost on to consumers.

Structured Finance Association (SFA) CEO Michael Bright, who served briefly as President of Ginnie Mae, leads the industry effort on behalf of bond investors. Quick prepayment speeds on VA mortgages make investors skittish about Ginnie II MBS pools, said Bright in Inside Mortgage Finance.

Bright neglects to mention that VA mortgages are a benefit to Americans in uniform. In effect, Bright and the SFA want to deny consumers the legal and contractual right to refinance home mortgages without penalty. We'll just impose penalties on the lenders. And who benefits? The largest banks and bond investors around the world represented by the SFA. Now Senator Warren should talk about that!

As with last year, the key issue in credit in 2024 remains volatility. Gross charge-offs on total real estate loans doubled between Q3 and Q4 2023, but this is all about commercial exposures for banks. Ponder the fact that net-loss on 1-4s is negative, yet charge offs on all real estate loans still doubled.

Credit card and nonfarm nonresidential commercial real estate loans drove the quarterly increase in the noncurrent rate in Q4, FDIC reports. Industry income was essentially cut in half by FDIC assessments and continued weakness in non-interest income. 

Only when you look at the US banking industry from the aggregate level does the full impact of the weak Q4 2023 results come home. The difference between the top 25 banks contained in the WGA Top Bank 25 Index and the rest of the industry is growing.  Indeed, the credit recession that was visible forming in 2019 and was delayed by the COVID pandemic and the absurd fiscal and monetary response is now rushing back into view.


Subscribers to The IRA Premium Service login to download The IRA Bank Book for Q1 2024.  Stand along copies are for sale in The IRA Store. Use coupon “BankBookQ1” to save $99 on your purchase through the end of March 2024. Many thanks!

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