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Mortgage Crises Yesterday and Today

Updated: Jan 5

“In an August 2005 interview, Robert Shiller predicted U.S. house prices could fall by 40 percent (Leonhardt, 2005). The S&P/CaseShiller U.S. National Home Price Index began to fall in the third quarter of 2006. The house price index for purchase transactions produced by the Office of Federal Housing Enterprise Oversight (OFHEO) declined for the first time (since 1993) in the third quarter of 2007.”

David C. Wheelock

FRB St Louis Review

May/June 2008

January 4, 2022 | Over the holiday break, we focused on a couple of writing projects in between watching football and holiday reunions. In particularly, we wrote a new column for National Mortgage News on the return of the Zombie loan. We also put some finishing touches on a new paper on enhancing the liquidity of Ginnie Mae mortgage servicing assets that we'll be posting on SSRN. And we had a great conversation with Wilfred Frost of CNBC on the outlook for banks in the US in 2022.

The good news of sorts is that the outlook for residentially house assets generally remains quite positive, with the exception of the prospective re-default of tens of thousands of loans that were modified at the behest of progressives in Congress as a result of COVID.

As these zombie COVID loans default, again, servicers will simply modify the loans and sell the loans into a new pool – and pocket a new gain on sale. Perfect. Indeed, until such time as voters show the progressives the door, these re-defaulted or "zombie" loans will simply be rolled, again and again. And the taxpayer, through the GSEs and the FHA, will foot the bill.

The bad news, however, is that the urban subset of commercial loans, including mortgages on multifamily real estate, are in for a tough year. National statistics for commercial real estate are improving, yet for some reason the indicator of loss given default or LGD for the $500 billion in bank-owned multifamily loans was 75% of the loan balance in Q3 2021. This is above the ten year average LGD for multifamily loans.


Loss rates for multifamily loans owned by banks have been elevated for two years, even before COVID. While the absolute number of defaults is low, it is far higher than the other series for residential housing, all of which show net-charge off rates at or below zero. Notice that LGD on multifamily loans and 1-4s basically tracked up through 2017, then diverged.

Meanwhile, the LGD for 1-4s was negative 130% in Q3 2021, meaning that banks are generating more than twice the loan proceeds in those rare instances when they sell a home in foreclosure. This metric, which is based upon the Basel I methodology, suggests that home prices are very inflated. Send those cards and letters to Chairman Jerome Powell c/o The Federal Reserve Board in Washington.

Two obvious questions should occur to investment and risk managers: First, how big will the losses be to lenders as a result of the credit problems facing urban commercial and multifamily properties? Second, how much longer will the positive, really surreal credit conditions persist in 1-4 family assets? As we’ve already noted, there are signs of lender fatigue and credit stress in some of the more aggressive fringe products in the housing complex.

Our best guess on commercial credit exposures is that banks and bond holders could face tens of billions in losses over the next several years. The change in asset utilization for many urban properties in New York City is profound. New York City and its environs face a difficult period of right-sizing government to fit a metropolis with an expanding sense of entitlement and a shrinking commercial base.

The commercial real estate community and the lender banks are putting brave face on a daunting situation. A group of nine banks provided the $3 billion to SL Green, the National Pension Service of Korea and Hines’ One Vanderbilt in June 2021, The Real Deal reports. Wells Fargo reportedly originated half of the total debt, or $1.5 billion, while Goldman Sachs contributed $600 million. Bank of America, Bank of China, Bank of Montreal, Deutsche Bank and JPMorgan Chase each provided $150 million.