Housing Finance Outlook | Q2 2025

March 17, 2025 | Premium Service | In the this issue of The Institutional Risk Analyst, we provide subscribers to our Premium Service The Outlook on US Housing Finance as Q1 2025 comes to an end. Given the changes already seen in the first three months of 2025, this will be an eventful year in housing finance and the credit markets more broadly.

May 2025 Release!

With inflation indicators going contrary to the indicated narrative, the Street is walking back interest rate cut predictions again, this time to the second half of the year. Issuers are reacting accordingly. Meanwhile, the Trumpian Wave is sweeping through the federal government and the housing sector is seeing significant changes in how much Depression era government agencies will support the housing markets in the 2020s.

There is an old rule on Wall Street that industry sectors like airlines and auto manufacturers are trades rather than investments, but you could also add the housing GSEs to that list. The shares of Fannie Mae and Freddie Mac are down double digits over the past month, but each is still up hundreds of percent over the past year. Hedge fund moguls like Bill Ackman count the GSEs as among their best trades. Yet investors betting on release of the GSEs in the near term may have to wait until the Trump Administration's conservative allies in Washington complete a significant downsizing of the enterprises. 

Federal Housing Finance Agency Director Bill Pulte was confirmed by the Senate in early March. Most of his public comments in recent weeks have been focused on achieving costs savings at the GSEs. Or to put it another way, slimming down the business footprint of the GSEs and walking back the Biden Administration’s idiotic loan pricing changes is not likely to help the cause of release from conservatorship. Under President Donald Trump, the Department of Government Efficiency (DOGE) has slashed headcount and vendors at HUD, the FHA and Ginnie Mae. Are Fannie Mae and Freddie Mac likely to be significantly downsized in terms of headcount and breadth of assets and activities? The answer is yes, as we discuss below.

Outlook for the GSEs

When members of the mortgage industry ask what the Trump Administration intends for the GSEs, our response is simple: ask Peter Wallison at American Enterprise Institute (AEI). Back in 2018, Peter wrote an important paper that argued in favor of downsizing and even eliminating the GSEs via administrative action. The conventional loan limit would be reduced and the market above the cap would be turned into a private, bank only market that is not to-be-announced (TBA) eligible. That is, conventional loans would no longer be risk-free assets guaranteed by Uncle Sam.

The screen for Fannie Mae TBAs and swap spreads is shown below. Look at the spreads vs Treasury yields for COVID-era 3s, 3.5% and 4% MBS coupons compared with the current production Fannie Mae 6s for April delivery.

Source: Bloomberg (03/14/2025)

If the GSE’s were to exit the TBA market and become private issuers, you will no longer see quoted prices for financing conventional loans via repurchase agreements, as today. Pricing and advance rates on bank warehouse lines would also change. Best case scenario would be a new TBA market for conventionals at wider spreads, but global MBS investors, banks and other key market counterparties may not play along if the issuer is a "A" or even "AA" credit. Given a choice between Fannie Mae and JPMorgan's (JPM) bank unit, both at "AA," speaking as a correspondent seller/servicer, which do you pick?

The top half of the conventional market by size would probably go to the banks and the smaller, lower FICO loans would go to FHA or somewhere else. All government “mission” lending would go through the FHA and HUD. Notice that the AEI paper, which can be downloaded below, is authored by a who's who of conservative housing analysts, many of whom we've known for decades. 

Taxpayer-and-Home-Buyer-Protection-Housing-Finance-Plan-1.26.18.pdf

Download PDF • 2.70MB

Perhaps more significant, a second 2025 paper by Ed Pinto at AEI claims that removing the government from guaranteeing conventional mortgage loans will reduce the cost of Treasury debt issuance, as though the burden of mortgage secured mortgage finance is somehow forcing up government bond yields. The 2025 AEI paper can be downloaded below.

Estimating-the-Treasury-Savings-by-Eliminating-Agency-MBS-Final 2025-02-20.pdf

Download PDF • 925KB

In fact, the GSEs provide significant support for the Treasury market and reduce the cost of financing for the United States. The TBA market for conventional loans and MBS adds liquidity to the Treasury market and is used to hedge Treasury debt and other agency debt exposures. The GSE’s cash management operations and the TBA market are an important source of liquidity for Treasury debt. Eric Hagen at BTIG summarized the impact of the GSEs on the Treasury market:

“The GSEs typically supply liquidity to the repo market by depositing excess cash into Fed Funds, or sweeping cash into the dealer-to-dealer market at Fixed Income Clearing Corp. (FICC), the venue where the bulk of government repo gets borrowed by the non-bank community of mortgage REITs, hedge funds, and other levered asset managers. There's $100+ billion of daily liquidity for Treasuries and mortgages at FICC, where spreads over SOFR tend to be a touch higher than tri-party.”

Source: Ginnie Mae

Today, loans endorsed and sold by the GSEs can be financed like T-bills in the bank warehouse or repo markets. If the $8 trillion in conventional mortgage debt is no longer TBA eligible, however, then liquidity for the Treasury market will be reduced accordingly. Treasury dealers will be forced to hedge positions in GNMAs or offshore in Eurodollar swaps. Treasury and also corporate bond spreads will widen and the cost of issuance for the US Treasury will increase across the entire market.

While you may not have heard a lot of discussion of the original 2018 AEI paper in the media or from the hedge funds pushing the release narrative, we think downsizing or even elimination is a far more likely scenario for the GSEs than release from conservatorship. As the 2018 Wallison paper notes, multifamily, second liens and second home mortgages would all be discontinued at the GSEs in a perfect world. As yet we have seen no indication that the trades or the mortgage industry understand what is coming in terms of pretty radical changes to the conventional mortgage market.

Multifamily Risk Grows

Multifamily delinquency jumped to 1.35% for all banks in Q4 of 2024, BankRegData reports, a pretty substantial increase given that the average loss-severity for bank owned multifamily has been around 100% of the original loan amount for a couple of years. The volume and severity of multifamily losses appears to be accelerating. The headcount and program reductions at HUD already announced by the Trump Administration will put pressure on the weaker parts of the market and particularly federally subsidized housing. 

Delinquent Bank Owned Multifamily Loans (%) | Q4 2024

Source: FDIC/BankRegData

The FDIC just released the latest set of bids on multifamily assets from the estate of Signature Bank, The Real Deal reports. Pricing is coming in at ~ 50 cents on the dollar of previous valuations. Blackstone (BLK) has announced its intention to sell more of its share of Signature Bank assets in New York City. “The joint venture of Blackstone, Rialto Capital and the Canada Pension Plan Investment Board is marketing $395 million worth of commercial property loans in the tri-state area, Bloomberg reported. 

The FDIC still controls JVs with 80% interests in many of the remaining rent stabilized assets owned by the Signature Bank estate. While the bank regulator has leaned in the direction of bidders who will work to preserve these older, smaller multifamily properties as required by law, at some point the poor economics of these assets will force FDIC to sell for whatever recovery value is available. Meanwhile, as we noted in our previous comment, the FDIC and other regulators are quietly changing the characterization of many commercial assets to reflect heightened concern about credit quality. 

Source: FDIC

As and when the FDIC Receivership does liquidate the Signature Bank portfolio, the losses in the 2023 failure will increase and thereby reveal part of the disaster left behind by the Biden Administration, both at FDIC and at the three federal housing agencies. Yet outside of the world of subsidized housing in blue states, investors are deploying significant capital in rental markets such as South Florida and Texas. Because of these strong investment flows into new projects, there is a growing divide between valuations for new and old properties.

Residential Mortgage: Rising Delinquency

In sharp contrast to the uncertain world of multifamily real estate, national and average default rates in residential mortgage assets remain at record lows, although delinquency in the bottom quartile of the distribution in terms of household income and FICO scores is rising fast. There are hundreds of thousands of distressed borrowers in government-insured loans hidden in sham forbearance programs created by the Biden Administration that will eventually face foreclosure. President Trump and his appointees must clean up the mess. 

Source: FDIC, MBA

“Although mortgage delinquencies rose only ten basis points in the fourth quarter of 2024 compared to one year ago, the composition of the delinquencies changed,” noted Marina Walsh, CMB, MBA’s Vice President of Industry Analysis last month. “Conventional delinquencies remain near historical lows, but FHA and VA delinquencies are increasing at a faster pace. By the end of the fourth quarter, the spread between the FHA and conventional delinquency rates reached 841 basis points, while the VA and conventional spread was 208 basis points.” 

Source: MBA

The chart below from the latest Ginnie Mae Global Markets Analysis Report shows the distribution of FICO scores by issuer.

New loan volumes in 2025 are likely to be below 2024 levels, in part because of growing uncertainty about the timing of future interest rate cuts. Another factor pushing rates up and volumes lower is that despite consistent predictions of the return of depositories to purchasing MBS, in fact the situation remains decidedly muted. MBS spreads are well-above 1% and may even widen in the short-term. The Fed's balance sheet reduction has throttled deposit growth, even while Treasury's record issuance of T-bills encourages growth in money market funds.

Source: FDIC

Until the Fed slows or stops the shrinkage of the system open market account (SOMA), bank deposits are not likely to grow and thus allocations to MBS are likely to remain weak.  As and when we see spreads between current production 6s in MBS and the 10-year Treasury tighten, then you’ll know that the banks are buying. But having said that, the better managed banks are going to leave MBS and Treasury paper in the available for sale bucket to force a constant mark-to-market. 

Meanwhile in the market for MSRs, volumes remain constrained and market participants are starting to factor increased delinquency into pricing. We talk about the MSR market in our next column in National Mortgage News. 

Source: FDIC

“Our collective thought is that MSRs may move lower, but driven by anticipated rate decline and therefore higher prepays and lower float if the Fed eases,” notes Mike Dubeck, CEO of Planet Mortgage. “All that is can be offset with hedging and we do just that. A secondary driver is higher delinquencies as we have seen an increase in the 90+ bucket will impact valuations. First time home buyer seems to be a driver of delinquency increase.”

Mortgage Equity: Q1 2025

Our mortgage equity surveillance group as of the market close on 3/14/25 is shown below sorted by 1 year total returns.  We provide some comments on the latest results for the industry in Q4 2024. .

MORTGAGE EQUITY SURVEILLANCE | TOTAL RETURN (%)

Source: Bloomberg (03/14/2025)

We have already noted the stellar performance of the two GSEs, driven largely by hype in the equity market about the prospect of release. Given the limited liquidity in these stocks, it is relatively easy for larger holders to influence the price action and short-term direction.

After the GSEs, we see mortgage brokerage Compass (COMP), like the GSEs up triple digits for the year and even still up over the past month because of speculation about industry consolidation. Rocket Companies (RKT) announced the purchase of Redfin (RDFN) earlier, signaling that the consolidation of the mortgage industry is accelerating. Rocket describes the transaction as part of a purchase mortgage strategy, but originating and retaining residential mortgages, any mortgages, in portfolio is the real endgame.

After COMP is Finance of America (FOA), the dominant reverse mortgage issuer after its acquisition of American Advisors Group. Onity Group (ONIT) is the other significant reverse issuer. A year ago, FOA was in danger of being de-listed, but since that time the stock has taken off on a momentum fueled tear. FOA completed a debt-exchange offer later in 2024 and positioned itself as the leader in reverse mortgage products.

FOA did $1.9 billion in funded volume in 2024 vs $1.6 billion the year before, just a tiny fraction of the potential market opportunity. The biggest shareholder of FOA is The Blackstone Group (BX), owning 32% of the company's shares, but total institutional ownership is over 50% and insiders own almost a quarter of the stock. With all of these institutional players long the stock, the free float is minimal and thus created a perfect opportunity for a momentum trade.

Finance of America (FOA) | 2024

The Bottom Line

As the mortgage industry prepares for higher delinquency ahead, business strategies are focused on defending assets in portfolio more than making new loans. Independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks reported a pre-tax net loss of $40 on each loan they originated in the fourth quarter of 2024, a decrease from the reported net profit of $701 per loan in the third quarter of 2024, according to the Mortgage Bankers Association’s (MBA) Quarterly Mortgage Bankers Performance Report.

We expect residential lending volumes this year to track below 2024 levels, again because expected interest rate reductions have not materialized. In contrast to the heady optimism of Q3 2024, the tone in the first quarter of 2025 is far more cautious. Total mortgage volumes, including residential and commercial are relatively flat, but financing for newer commercial and multifamily projects is increasing.

In 2025, we expect to see an increasingly conflicting picture where credit for new commercial and multifamily projects is healthy, but losses on older assets are increasing for banks and public sector guarantors. The travails of the multifamily market are going to become more apparent to the general public as the year progresses. A reduction or withdrawal of HUD/GSE credit cover for multifamily assets is going to create a big mess, both for investors and banks alike.

As we noted in an earlier comment, bank-owned multifamily is about $600 billion in unpaid principal balance (UPB), while non-bank multifamily loans – including the GSEs – is another $1.6 trillion in UPB, for a grand total of $2.12 trillion, according to the MBA. If the Trump Administration cuts off government lending to multifamily markets, as currently seems likely, then most of these assets will probably default. We are big fans of GSE reform, but we hope the Trump Administration moves deliberately.

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