Mortgage Market Notes; A Lehman Moment for Apollo Management?

March 26, 2026 | The Institutional Risk Analyst is in Tampa this week for the annual event sponsored by Fay Servicing, this year at the Gathering Room within the Armature Works. We kinda miss the events at John Barleycorn Bar down the street from Wrigley Field, but next year we'll drive to the Fay event. No airport, no TSA lines. Just cruise up the I-75. Now that's a concept.

We’ll be speaking about developments in and around the markets and in Washington that affect the mortgage industry later today with our friend Tim Rood, CEO of Impact Capital. Some notes in that regard follow below. Impact Capital is developing leading edge AI business solutions for the real estate and mortgage industries.

Is Private Credit Systemic?

First a quiz.  Q: Who was one of the top two borrowers from the Federal Home Loan Banks ("FHLBs") in 2025? A: Apollo Global Management's (APO) Athene insurance unit. Apollo/Athene didn't even appear on the top 10 advances list until year-end 2024, and has gone from 2.1% of total advances then to 3.4% as of year-end 2025. 

Only Truist Financial (TFC) is larger than Athene in terms of advances, but the total exposure of the FHLBs to Apollo is far bigger, as discussed below. The FHLB annual report is available here.  JPMorgan (JPM), Wells Fargo (WFC), U.S. Bancorp (USB) and MetLife are all above 2% of total advances.

Also notable on the top-ten borrower list is private Midland Financial, parent of MidFirst Bank and the largest buyer of early buyouts (EBOs) from Ginnie Mae MBS. MidFirst appeared as an FHLB borrower for the first time at year-end 2025, with 1.9% of total advances.

If the $40 billion asset MidFirst Bank ceased buying defaulted EBOs from Ginnie Mae issuers, it is not clear who would pick up the slack. Notice that the FHLBs are indirectly, through MidFirst Bank, financing delinquent loans from nonbanks. Notice too in the chart below that the 90+ delinquent category has been rising since Q3 2025, when the Trump Administration ended COVID-era loan forbearance.

Source: FDIC

Does the forced liquidation of private credit strategies threaten the thinly capitalized FHLBs? Are Apollo and other sponsors of private credit strategies facing a Lehman moment in slow motion? Yet for all of the social media fuss about investors demanding early redemption from private credit funds, APO and other sponsors continue to raise new money. Certainly this is a striking comment on the state of the US financial markets. 

Private equity/credit sponsors can hide liquidity problems in portfolios from investors and regulators by secretly arranging bank loans to hide insolvency. "Private Credit originators may now creatively 'staple' an iron-clad line of credit to an ostensibly “non-PIK-able” private credit loan," notes Victor Hong in a LinkedIn post.

"The loan owner books this inseparable line of credit, as a distinct funding commitment TO the loan obligor—-but without describing its practical role as a hidden PIK option, and hence can report 'zero' PIK-able loans in portfolio. The loan obligor can elect to 'pay' any loan interest or principal cash flows due, by simultaneously drawing the equivalent cash amount from the Line of Credit AGAINST that very same loan owner (lender), as exact offset. Of course, the economic result is still PIK and advancing more principal on existing principal (" P.O.O.P")."

Earlier this week we spoke with Charles Payne at Fox Business about the unwind of the private credit trade, something that had to happen once retail investors were allowed to participate in what is a completely illiquid investment strategy.

(See the rest of our comment on Private Credit below.)

Mortgage Market Notes

The US Treasury market has backed up almost half a point since the start of the Iran war with the US and Israel. More important, this week's U.S. Treasury auctions showed weak demand, with the $69 billion 2-year note auction on Tuesday, March 24, 2026, described as poor, according to the Wall Street Journal. 

Two year yields surged to 3.936%, the highest since July, reflecting investor unease. The subsequent 5-year note auction on Wednesday also saw underwhelming demand, following rising geopolitical tensions. The 10-year Treasury note closed yesterday on a yield of 4.35%.

Not surprisingly, conforming mortgage rates have risen to 6.30%, even though some online retail lenders are still offering teaser rates down near 6%. As we never tire of reminding readers, mortgage lenders set loan coupons, markets determine bond yields.

Mortgage applications fell 10.5% last week, led by a 14.6% drop in the refi index and a 5.4% decline in purchase applications, notes Scott Buchta at Brean. Primary rates rose 13bps last week, according to the MBA. We are now approaching the all-important 6.5% mortgage rate threshold, Brean notes, where lending volumes can decline significantly.

As we note in our latest column in National Mortgage News (“Pulte got the condo insurance call right”), on March 13th, the Trump Administration issued an executive order to roll back a number of rules and regulations that were put in place after the 2010 Dodd Frank law to encourage more availability of credit for housing from banks. 

Many of the proposed changes are beneficial to the industry, but difficult market conditions are likely to force more market consolidation. We still don't know, for example, who is the winner of the sale of Two Harbors (TWO). Eric Hagen at BTIG writes:

"TWO's ad hoc committee determined the unsolicited all-cash offer from CrossCountry Mortgage (CCM, Private) at $10.70/share is considered superior to United Wholesale's (UWMC, Buy, $10 PT) existing stock-for-stock offer of 2.3328 shares of UWMC for each share of TWO. An additional unsolicited bid came in over the weekend from another unnamed bidder at $10.75/share. We see the potential for a bidding war, but we'd be surprised if it fetched more than a 20% premium to NAV, which we currently peg around $11/share net of the quarterly dividend."

Meanwhile, on March 16, 2026, Freedom Mortgage Corporation announced, that its indirect parent company, Freedom Superior LLC, agreed to acquire Seneca Mortgage Servicing LLC (Seneca) and related entities from EJF Capital LP.

The deal expands Freedom's top-five mortgage servicing rights (MSR) portfolio and enhances its operational capabilities. To us, it is notable that EJF founder and CIO Emanuel "Manny" J. Friedman, who has successfully focused on regulatory, event-driven investing in real estate and financial services for decades, decided to exit the mortgage servicing business. 

The GSEs, Fannie Mae and Freddie Mac, have been busily buying MBS, but mortgage market scribe Rob Chrisman reminds us that “lenders and LOs know that we’re in a global economy, and decisions made overseas can impact our mortgage rates.”  

The GSEs were the top performing mortgage stocks of 2024-2025, but have been dead money since the MBS purchases were ordered by President Trump earlier this year. Both stocks have fallen dramatically since the start of the Iran war, as shown in the chart below.

The two big question with the GSEs, of course, are 1) are the stocks attractive at this stage and 2) whether or not they are hedging their portfolios effectively. We had a profitable short-term position in the GSEs last year, but would not be inclined to own them now. Simply stated, there is no catalyst.

Part of our hesitation is that in order to have an impact on mortgage rates, the GSEs would not hedge their growing MBS portfolio. But the backup in mortgage rates that has occurred since the start of the Iran war could cause one or both GSEs to incur substantial market losses sans hedge.  

The fact is that the GSEs are not the Federal Reserve and cannot buy trillions worth of MBS, unless of course FHFA Director Bill Pulte gets more creative. As we’ve noted in previous missives, Fannie Mae and Freddie Mac should buy back low coupon MBS at a discount, then sell the "AAA" rated paper into collateralized mortgage obligations (CMOs), and make money doing so. Treasury could do the same with low coupon T-notes.  If this is not clear, Director Pulte, please do give us a call.

One of the more important issues affecting housing in Washington is the implementation of a partial claim process at the Veterans Administration. Last year Congress passed the VA Home Loan Program Reform Act (H.R. 1815), which was signed into law on July 30, 2025, establishing a new five-year partial claim program. This legislation allows the VA to pay lenders for delinquent payments (up to 25% of the loan amount), helping veterans avoid foreclosure by deferring payments to the end of the loan.

This new statutory authority replaces the temporary VA Servicing Purchase (VASP) program that ended in April 2025.  Since the passage of the legislation, the VA and members of Congress have been negotiating the details. While the law is in effect, specific lender procedures and amendments to the servicer handbook are currently in the “implementation phase.” The hope is to have a permanent program for VA that mirrors the partial claim process of the GSEs.

Finally, the Real Deal reports that a federal judge in the Eastern District of Texas struck down the 2024 Financial Crimes Enforcement Network regulation that forced nationwide disclosure of all-cash residential homebuyers.

U.S. District Judge Jeremy Kernodle ruled the agency overstepped its authority by failing to justify why all-cash residential transactions should be broadly treated as suspicious. The decision means federal oversight of illicit capital flows in real estate reverts to FinCEN's prior, narrower geographic targeting orders.

Is Apollo Facing a Lehman Moment?

Are the growing demands from investors for early depemption of private equity/credit funds a liquidity threat to Apollo and, indirectly, the FHLBs? Athene Holding Ltd. (ATH) was delisted from the New York Stock Exchange (NYSE) in January 2022. The delisting was due to a momentus merger with Apollo Global Management, which was completed simultaneously. 

Want to read more?

Subscribe to theinstitutionalriskanalyst.com to keep reading this exclusive post.

Subscribe Now