Housing Finance in the Age of Volatility: GHLD, UWMC, RKT, COOP, JPM

May 9, 2025 | Premium Service | As we get to the back of the Q1 2025 reporting period, issuers such as Guild Mortgage (GHLD) and United Wholesale Mortgage (UWMC) have released earnings. The common themes seem to include compressing loan gain margins and volatility in the mortgage servicing asset.  As the belly of the Treasury yield curve rallied at the end of Q1, mortgage servicing rights (MSRs) were discounted heavily by the model driven world of Wall Street. But do the models mark to the actuals?

In the regulatory world, they call MSRs “assets” rather than "rights" because the servicing strip can suddenly become a liability given enough interest rate volatility. The past quarter illustrates this tension. Below we look at the results for GHLD, UWMC and other residential issuers for the edification of our Premium Service subscribers. But first let’s check in on continuing the train wreck known as commercial real estate and particularly multifamily rental properties as a federal bailout looms.

When you hear President Donald Trump exhorting the Federal Open Market Committee to cut interest rates, that’s because he knows that much of the legacy multifamily sector is slowly, painfully sliding into default and restructuring. While residential issuers still benefit from the post-COVID surge in home prices, multifamily assets did not and actually saw declines in appraised values as interest rates and, more important, cap rates rose dramatically. Post-default net loss rates on bank-owned multifamily loans went back to 100% by 2021 due to the surge in progressive political interference in the housing markets during and after COVID. Markets in progressive blue states are tight because there is no supply of affordable homes.

As of Q1 2025, default rates in single family real estate are still close to zero for high FICO, low LTV assets typically owned by banks.  This will change, however, over the next several years, as the distortions caused by QE slowly subside, supply grows and the cost of default reverts to the LT mean of ~ 70% net loss.  This process of adjustment will proceed based upon the change in home prices since loss given default (LGD) is essentially a reflection of collateral values.

The chart below shows LGD for $3.7 trillion in bank 1-4s and $630 billion in bank-owned multifamily loans. Notice that net loss rates for bank owned 1-4s are still averaging near zero, but at the end of 2021 this metric was -100% for multifamily, using the Basel I methodology employed by WGA.

Source: FDIC/WGA LLC

In the prime land of bank multifamily real estate, average loss given default continues to be near 100% of the loan amount. Losses for many loans are higher than the original amount of the loan. Why? This reflects the fact that a number of multifamily properties are deep underwater on a cash flow basis, mostly due to excessive debt at lower rates. Lenders don't want these moribund properties and the ostensive "owners" are just trying to survive, as shown in our favorite chart below. Note that real-estate owned by banks post-foreclosure is near zero and the banking industry still has two quarters worth of earnings "earned but not collected."

Source: FDIC

Many multifamily owners are waiting to be rescued by the Federal Reserve, as occurred in 2020. But the owners and their investors may be disappointed because the next interest rates cycle may not see LT rates fall along with the target for Fed funds. Indeed, the sheer weight of negative leverage is starting to cause significant distress for the supposed “owners” of new and old multifamily. One of our favorite reads in the world of multifamily real estate, MTS Observer, sets the stage nicely:

“Negative leverage” is a set of conditions whereby the initial, unlevered return on an asset is lower than the prevailing cost of debt. As a mathematical fact, this means that the levered return on such an asset will be lower than the unlevered return, thus injuring the buyer-owner for using leverage. Despite this, negative leverage in commercial real estate today is common. In apartments specifically, it is ubiquitous.

As we’ve noted for the past several years, multifamily real estate is the new subprime market, a situation driven by the fact that consumer income has been flat to down for years, but the cost of rent (and operating expenses of multifamily properties) is only going up. In states like New York, the fact of progressive rent control legislation has rendered many of these multifamily assets impaired, being unsalable at previous valuations and thus unfinanceable at current interest and cap rates. When the FDIC finally sells the remaining majority shares of the Signature Bank portfolio, the dismal results will confirm the cost of progressive politics for New York consumers.

The only hope of survival for many underwater multifamily properties is the Fed, but even a large cut in ST interest rate targets may not rescue these firms from the twin hazard of high financing costs and equally high cap rates. By no surprise, Senators Ruben Gallego (D-AZ) and Dave McCormick (R-PA) have cosponsored legislation to increase Federal Housing Administration (FHA) multifamily loan limits just as the sector is getting ready to roll over. Even as President Trump talks about protecting the taxpayer, Washington is preparing to bail out the multifamily sector.

“The Trepp CMBS Delinquency Rate rose again in April 2025, with the overall rate increasing 38 basis points to 7.03%,” the CRE data firm reports. “In April, the overall delinquent balance was $41.9 billion, up from $39.3 billion in March. The overall rate has now cleared the 7.00% mark for the first time since January 2021… The multifamily delinquency rate soared another 113 basis points to 6.57%. This follows March’s increase, which marked the highest reading since March 2015, when the rate stood at 8.28%.”

Residential Lenders: GHLD, UWMC, RKT, COOP, JPM

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