January 27, 2025 | When President Donald Trump says that interest rates are too high, he may not fully understand just how right he is about the cost of credit. The “normalization” of interest rates has not only driven home purchase volumes to decade lows or more, but it has subjected trillions of dollars in commercial and residential assets created after 2008 and especially 2020 to a price reset. Large swaths of the financial landscape are under water in terms of loan-to-value (LTV), suggesting future credit losses ahead.
We have written about the generally positive situation with bank credit, but the banks are only showing you part of the story. Underneath the carefully curated pictures of current bank credit and earnings lies a disturbing cash reality as more and more borrowers fall behind on payments and are given forbearance. The chart below shows almost $100 billion in bank revenue accrued but not received through Q3 2024.

Source: FDIC
That's right, US banks have reported $100 billion in revenue they have not received or about two quarters of earnings. Outside of the regulated confines of commercial banks, the picture is even less rosy. And the credit picture at the lower end of the spectrum in terms of default probability is eroding rapidly. In fact, although the aggregate credit picture going into 2025 still appears fairly normal, we continue to collect data points that suggest the reported credit loss and delinquency numbers, and the cash actuals at ground level, have never been further apart.
Whether we are talking about the inflated valuations of private equity portfolio companies, revenue of banks accrued buy not collected, or the default rate on government insured loans, the picture of credit is growing darker. For example, the quest for government efficiency under the Trump Administration could have a significant impact on commercial real estate credit (CRE).
New reports suggest that the Trump administration may sell 2/3 of federal office stock in Washington CRE daily reports, “which could reshape DC’s real estate market and leave landlords reeling.” That's one way to put it.
Of the $500 billion in CRE loans maturing this year, 14% are considered underwater, meaning the outstanding debt exceeds the asset's current value, according to MSCI. Multifamily housing and office properties are said to be particularly at risk. The chart below shows average prices for CRE nationally.

One of the enduring legacies of COVID and the Fed’s massive open market purchases of securities is that many banks and other depositories are insolvent, just as the central bank itself is insolvent. Yet despite the very public and obvious fact of insolvency, the Fed pays the bills of the Consumer Financial Protection Bureau and also handsome dividends to member banks.
“For the first nine months of 2024, the Federal Reserve Banks in the aggregate paid over $1.2 billion in dividends to their shareholders,” notes our friend Alex Pollock. “Yet at the same time, they together lost the gigantic sum of $63 billion. On an annualized basis, they are paying dividends of $1.7 billion, for a dividend yield of about 4.5%, while losing about $80 billion, with negative retained earnings and capital. How is that possible or ethical, you might wonder.”
In the same way that we pretend that the Fed is positively capitalized, we are also pretending that literally hundreds of banks, thrifts and credit unions are solvent, even though published financial data suggests otherwise. If your bank has retained a lot of 2% MBS, CRE loans and other types of low coupon assets from the vast volumes forced by the FOMC during 2020-2023, then the bank or credit union is probably insolvent. Today coupons are higher, but new loan volumes have fallen off dramatically.
Even with the gradual runoff of mortgage portfolios, 56% of all residential loans are below 4% coupons and 70% are still below a 5% coupon. This metric tells us that any refinance wave is a long way off. Also, the volume of new MBS is going to be under downward pressure even if the Fed eventually drops short-term rates. Not only is the 10-year Treasury note a good surrogate for residential mortgage rates, but it also informs our view of mark-to-market problems inside banks and other depositories with the 10-year yield approaching 5%.
Confirming the view seen so far in Q4 earnings, the data from Experian shows auto loan delinquency down slightly in Q4. Auto lease write-offs are at 14.0 bps, down from 15.4 bps last year. And bank and private label credit cards are likewise muted in terms of delinquency through November.
However, total delinquency in residential mortgages is rising. The severe delinquency rate (share of balances 90+ days past due, in bankruptcy or foreclosure) is now 0.60%. This is up 13 bps from a year ago, when it stood at 0.47%, reports Experian. If we then start to factor in the degree of forbearance reflected in the official data, the picture becomes more serious.
Residential Loan Delinquency

Source: MBA, FDIC
The Biden Administration spent the past four years hiding financial problems from the federal budget deficit to increased morbidity among low-income borrowers. If we look at some of the Ginnie Mae issuers with the highest DQ2 and DQ3 ratios (for 60 and 90 days delinquent), there are a number of state-supported issuers with visible default rates in the mid-teens. These issuers are in default on the credit provision of the GNMA Guide and thus are also in default on bank warehouse lines as well.
If, as we suspect, the incoming members of the Trump Administration take a tough line on credit costs and enforcement, some Ginnie Mae issuers with elevated levels of delinquency may lose access to bank funding. Whereas in 2021, when we saw high levels of delinquency and vast corporate cash flow due to refinance business, today we see slowly rising delinquency and falling loan volumes – a very dangerous combination. The chart below from the Ginnie Mae global markets report shows LTVs for different loan categories.

Source: Ginnie Mae
Without new production volumes, residential mortgage issuers must rely upon corporate cash to make up any shortfalls in outbound payments to MBS holders at the end of the month. If the Trump Administration raises the FHA mortgage insurance premium (MIP) back to pre-2023 levels, new loan volumes will suffer as a result. An increase in the MIP in today’s market may even be counter productive in terms of reducing industry volumes.
Other changes that the Trump Administration is likely to make in pursuit of fiscal righteousness could actually tip over the proverbial apple cart in the world of residential lending. One proposal we have mentioned in previous issues of The Institutional Risk Analyst is the idea of limiting partial claims on delinquent loans guaranteed by the Federal Housing Administration. If this proposal is finalized by whoever is lucky enough to lead the FHA under President Trump, then the visible default rate on FHA loans and Ginnie Mae MBS will surge. Hundreds of thousands of loans currently hidden in an endless cycle of loan forbearance will suddenly become very visible.
Just as many CRE loans are under water in terms of the value of the asset vs the existing debt, many residential loans are likewise at risk. At the end of November 2024, the average LTV ratio of loans in Ginnie Mae pools was an eye-watering 98.2% meaning that there is no equity in the $2.5 trillion in government insured loans. The average LTV for all residential loans was 85% -- if you give full credit to the private mortgage insurance in the conventional market. In a general housing market price reset, the boundary line between apparent stability and financial crisis has never been so thin as in 2025.
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