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The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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Will Credit Risk Transfer Save the Banks? Are MSRs Overvalued?

June 12, 2024 | Premium Service | For some time now, we have struggled to understand the net, net picture in commercial credit, on the one hand. The pristine state of residential mortgages and even relatively low defaults on credit cards and auto receivables, is on the other side of the coin. Down a second level, we see the clear deterioration of valuations for commercial real estate and mounting defaults across the wider commercial sector. Yet simultaneously a flood of cash is welling up from the ground in private credit to fund credit risk-transfer transactions and in size.

Banks, REITs and non-bank investors alike are transferring doubtful credits to investors in growing volumes. The acronyms used to describe these transactions are also expanding, a worrisome sign. Will CRT be enough to save the banks from credit Armageddon in 2025?  NPLs for commercial real estate loans owned by banks are already at levels not seen in over 15 years and the crisis in commercial real estate is not nearly begun. US banks just ended disclosure of loss-sharing agreements with the FDIC, but is it time for banks to disclose private credit risk transfer (CRT) transactions? 

Earlier we had written about some of the challenges facing Merchants Bank of Indiana (MBIN). “Eight quarters ago we see almost no NPLs in MBIN's Non Owner CRE portfolio,” writes Bill Moreland at BankRegData in his review of “sentry events.”

“Then over the next seven quarters we have 7 'events'. The $21,753,000 increase to $21,783,000 is what we call an NPL Spike. Most likely this is 1 or 2 CRE loans that have gone on Nonaccrual or are 90+ Days Past still accruing interest.”

What Bill is describing is a significant change in the rate of increase in the losses for MBIN and other lenders. The net loss numbers are still low, but they are moving fast, enough to signal concern for a veteran analyst like Moreland. We have seen similar “motion” in the loss data for other banks, something we attribute to the long period of suppressed default activity from the mid-2010s through COVID.  Has the proverbial rubber band of loss been released?

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