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March 3, 2025 | Premium Service | Whalen Global Advisors (WGA) has published the latest edition of The IRA Bank Book (ISBN 978-0-692-09756-4) , the quarterly outlook for the US banking industry.  The highlights of the Q1 2025 report include:

March 10, 2025  | Premium Service | Two years ago this week, Silicon Valley Bank imploded as the result of management incompetence and “supervisory failure, ” to paraphrase Treasury Secretary Scott Bessent’s comments to the Economic Club of New York last week .  We decomposed the failure of SVB in 2023 (" Who Killed Silicon Valley Bank?; The IRA Bank Book Q1 2023 "). Source: FFIEC (12/31/2022) The Federal Reserve Board noted in their post-mortem of the failure : “Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report.” The remarkable group which populated the financial portfolio of the Biden Administration left behind a huge mess. There are hundreds of banks and credit unions that have been left insolvent by quantitative easing c/o the FOMC that have not been sold or resolved. President Donald Trump and his team now own the mess. How big is the mess? A lot bigger that DOGE savings. Start with the billions of dollars worth of impaired rent-stabilized multifamily assets left over from the failure of Signature Bank and now festering inside the FDIC's Bank Insurance Fund. After you peruse the remnants of Signature Bank, t hen look at the $1.5 trillion multifamily book at HUD and the GSEs. Finally, look at delinquent residential exposures at the FHA, VA and USDA after four years of hiding consumer credit problems under Uncle Joe Biden. Government-insured residential and multifamily loans are the new subprime. " The 160,000 FHA Covid-19 Recovery Modifications performed over the last 2 years have/are running ~70% delinquent, ~55% seriously delinquent," writes John Comiskey . "The GNMA MBS disclosure data provides hard data on the majority of them with the other 40-45% of them that were never securitized likely faring worse." We warned readers of The Institutional Risk Analyst in 2017 about the problems being caused by the Fed's massive open market purchases of Treasury and especially mortgage-backed securities (" Banks and the Fed's Duration Trap "). This was before the December 2018 misstep by Fed Chairman Jerome Powell , leading to the infamous January 2019 pivot and public rescue of Powell by Janet Yellen and Ben Bernanke . The Fed then began to aggressively ease interest rates more than a year before the COVID outbreak , even selling TBAs in the mortgage market to force interest rates down. Unfortunately, the problems created by the Federal Open Market Committee between early 2019 and 2022 have not been resolved, leaving hundreds of banks and credit unions underwater on their securities and held-to-maturity loan portfolios. Don't forget the HTM loans. The old chart below from Bloomberg shows the index (LGNMMD) of the duration of all Ginnie Mae mortgage backed securities (MBS) from that period. The index was discontinued last year, of note. Ginnie Mae MBS Duration Index Total Duration of Ginnie Mae MBS One of the key failings of the regulatory community is not to use the public data from markets and banks to track business model behavior and therefore the solvency of specific institutions. SVB was an outlier in terms of the percentage of mortgage securities to assets. Before COVID, SVB was one of the best performing banks in the US, as we noted back in 2018 (“ Which Are the Best Performing US Banks? ”). When you're an outlier, though, you are outside the group, thus begging the question why. At the end of 2022, SVB had 43% of total assets in MBS vs 10% for Peer Group 1 . The SVB portfolio yielded 1.9% at that time.  At the end of 2024, the half trillion dollar MBS portfolio of Bank of America (BAC)  had a yield of under 2.5% vs an average cost of funds close to 3% of average total assets. Conventional 2.5% MBS for delivery in March are trading around 80 cents on the dollar, an illustration of the drag on future earnings this pile of low-coupon securities -- and loans -- represents.  One key metric investors may use in sifting through banks is whether management of the institution effectively managed duration risk in 2020 onward. If not, did the bank at least restructure the balance sheet to restore net-interest margin? Even taking a 20 point loss on those illiquid orphan MBS 2.5s is a winner for the bank when the proceeds are reinvested at twice the yield or more.   Most US banks have done nothing to address underwater loans and securities, hoping that the FOMC would rescue them from their gross negligence. Because a large number of bank managers have decided to sit on their hands rather than deal with the pain of restructuring an underwater bond portfolio, the earnings of the bank are impaired and the institution is more vulnerable to failure as a result. This is the primary reason, in our view, why acting FDIC Chairman Travis Hill decided last month to cease publishing the total assets of troubled banks.  “The FDIC began disclosing the aggregate assets of banks on the “Problem Bank List” at year-end 1990, an addition to the preexisting practice of reporting only the number of problem banks,” Hill noted in February . “Since then, changes in the industry over the past 35 years have made it comparatively easier to identify a large bank that is added to the list, resulting in a number of potentially negative consequences…” We think the decision by the FDIC and the Trump Administration to limit public information about troubled banks is poorly considered and, contrary to Chairman Hill's statement, will hurt public confidence in banks. When we worked at the FRBNY, one of the first rules in the bank supervision function was that we never talked about banks in public, any banks. FDIC putting out this statement at all was very unhelpful. Accordingly, since the FDIC is providing less information about troubled banks, below we publish the list of banks with yields on their MBS portfolio that are well-below the industry average (~ 3%) for the benefit of the annual subscribers to our Premium Service . If you are looking to assemble a list of troubled large banks, this is where you should start IOHO. Keep in mind, lenders are selling new residential mortgage loans into 6% MBS coupons this week, down from 6.5s last month. The fact that the US banking industry still has an average yield for MBS just below 3% illustrates the magnitude of solvency problems facing US banks five years since the outbreak of COVID. But to be fair to Secretary Bessent and Chairman Hill, this is part of a far larger financial mess in Washington left behind by the Biden Administration. The table below from Bloomberg  shows pricing for conventional MBS as of the close on Friday. Notice that 2.5% MBS for delivery in March were 82 bid, illustrating the magnitude of mark-to-market losses facing the bank.  Conventional TBA Market Source: Bloomberg (03/09/2025) Having a below-peer yield on the investment portfolio does not necessarily mean that the bank is on the FDIC’s troubled bank list, but it does suggest very strongly that the bank’s management is not paying attention to managing the bank’s duration in an effective way. SVB failed because of the indifference of management to movements in interest rates. Below we provide a table showing the Top 100 banks by MBS yield, starting with the lowest. We use data from the FDIC, the powerful tools developed by Bill Moreland and our friends at BankRegData, and another column we added showing the percentage of MBS to total assets. When you see a bank with more than 10% of total assets in MBS, that's a red flag in our book. Note that American Express Bank , one of the best performers in the industry, owns almost no MBS. Top 100 Banks by MBS Yield | Q4 2024 Source: FDIC/BankRegData/WGA LLC Notice the banks at the bottom of the list, like Axos Financial (AX) and Beal Financial , which have nicely managed their MBS exposure. Readers should use this list as a point of departure for thinking about banks that may be on the FDIC's now secret list of troubled banks. We would compare the banks with very low yields to the WGA Bank Top 100 list on the web site . "The number of banks on the 'FDIC’s Problem Bank List' decreased from 68 to 66 in the fourth quarter, the FDIC noted last month. "Problem banks represented 1.5 percent of total banks at year-end, which is within the normal range of 1 to 2 percent of all banks during non-crisis periods." The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

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.  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. 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. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 24, 2025  | Premium Service  | In the this issue of The Institutional Risk Analyst , we update readers of our Premium Service on the top seven US depositories – JPMorgan Chase (JPM) , Wells Fargo (WFC) , Citigroup (C) , U.S. Bancorp (USB) , Bank of America (BAC) , PNC Financial (PNC)  and Truist Financial (TFC) .

April 1, 2025  | Premium Service  | With the surprise announcement of the purchase of Mr. Cooper (COOP)  by Rocket Companies (RKT) , our earlier predictions of accelerating consolidation in the residential mortgage sector  have been fulfilled and then some. Combined with the purchase of Redfin (RDFN)  only days before, RKT has deployed its currency, financial power and reputation to up the ante on mortgage industry consolidation. Who are the winners and losers in this stunning escalation of the race to dominate mortgage?  Why is this transaction significant? First and foremost, the combination of COOP and RKT, plus RDFN, creates an integrated business of realty, lending, servicing and asset management that is impressive. RKT is the #2 lender behind United Wholesale Mortgage (UWMC)  and one of two nonbanks that play in the jumbo market, Inside Mortgage Finance Reports , the remaining top-10 issuers being banks led by JPMorganChase (JPM) . The addition of COOP and the largest primary servicing book in the industry gives the RKT franchise considerable new heft and internal cash flow generation, plus the ability to manage assets for institutional investors and other issuers.  But this transaction throws down the gauntlet to the rest of the mortgage industry. The remaining top-ten issuers must now make a speedy assessment of their market position and, in many cases, make a tough decision about buying and/or selling a business. When you see that established players such as Rate are considering selling major operating units or even exiting the business altogether, this speaks to the level of competition in the industry. The table below shows our mortgage equity group sorted by one year returns, what passes for a long time horizon in today’s market. But this list does not include all of the relevant players, many of which remain private in terms of equity but have significant relationships with institutional debt investors.  Mortgage Equity Group Sources: Bloomberg, Inside Mortgage Finance Second, it marks the marriage of two existing issuers who now control a top-2 aggregator in Rocket and the largest non-bank servicer in COOP.  We put both of these issuers in the category of firms that love to create and/or buy mortgage servicing rights. While COOP has been cautious about chasing market leaders such as Freedom Mortgage in the MSR market, when you have over a $1.5 trillion in primary servicing, you don’t need to stretch.  Now with RKT, COOP has an engine for creating MSRs that is equal to that of UWMC. The difference with UWMC is that CEO Matt Ishbia has been selling MSRs to fund his price war in the wholesale channel against RKT and other larger players.  We think that UWMC is a net-loser a world where lenders and large servicers join forces. Simply being a very efficient lender is not sufficient. “People don’t like selling MSR because they can’t originate them. But we can originate them and we make them every single day so we feel good about that,” Ishbia told IMF earlier this year. We tend to think that Ishbia is selling himself short by disposing of his MSRs at a discount to cost and, further, we think players such as COOP, Freedom and Bayview/Lakeview have it right when they acquire and retain MSRs rather than monetize the asset. If we consider the table above, the organizations with top-ten lenders and servicers are in the great competition for dominance in residential lending. Add private players such as Freedom Mortgage (#4 lender, price leader in MSRs) and the Bayview/Lakeview binary (#2 owned servicing) to the mix. But the bottom line is this: If you are not a top-ten lender and a top-ten owner of servicing, then you are a target. Eventually the logic of low lending volumes and high prices for MSRs will drive you to sell your assets and exit the business.   With the announcement of two significant M&A transactions, RKT has paid a price in terms of ST equity valuation, but we like the prospects for RKT going forward. WGA has served as an advisor to COOP for many years. We also know the leadership at RKT and have a high regard for the company’s culture and also the financial resources of the Rocket Companies created by billionaire Dan Gilbert and led by CEO Bill Emerson . Source: Yahoo Finance Indeed, the cultural fit between the two mortgage issuers, with a focus on serving the customer, from retail borrower to institutional investor, is very powerful. RKT brings operational excellence and a strong market position lending, while COOP brings good lending, a larger servicing book and, significantly, asset management expertise that is a very rare commodity in the world of residential mortgages.  The firms that will dominate the mortgage market in the future will have top-ten lending capability, double digit share in servicing and a robust asset management arm to raise capital from institutional investors and particularly insurers. Bayview, COOP, Carrington and PennyMac Financial (PFSI) are among the few firms that have effective asset management capabilities. As the mortgage industry continues to consolidate, firms with established relationships in the bond market for debt finance and among institutional investors for raising new equity will inherit the earth. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

April 8, 2025  | Premium Service  | Below we provide a summary of last week’s conference call with the subscribers to our Premium Service . We also set up Q1 2025 earnings in the wake of the biggest equity selloff since the outbreak of COVID in 2020 and the collapse of the market for US Treasury securities in March of that year. JPMorgan (JPM)  CEO Jamie Dimon  says thar the new trade initiatives should be resolved quickly and that is, of course, the hope, but meanwhile trillions of dollars in inflated paper wealth is being destroyed by the Trumpian wave.  The WGA Bank Top 100 Index has given back virtually all of the gains made in 2024 and then some. Notice in the chart below showing the top 103 public banks in Peer Group 1 by market cap that Flagstar Bank (FLG) is currently the top performer. We sort the group based upon three-month total return (starting from left). FLG is at the top, largely because the stock has not moved while the rest of the group has fallen. Some of the largest banks by assets have dropped from the top quartile into the bottom half of the distribution, with Bank of America (BAC) and American Express (AXP) now in the bottom quartile. Source: Bloomberg (04/07/2025) Last week in the conference call for our subscribers, we made several basic points about the current market environment. Markets : The equity market selloff since the start of the Trump Administration has essentially wiped-out the gains on financials over the past year and more. We view the media yowling about the tariff policies of President Trump as more of a distraction than substance, but growing signs of a recession and increased credit costs are very serious. We advise our readers to do their homework on names and asset classes that have been abruptly revalued, in many cases appropriately so, but to keep the powder dry until this market volatility begins to subside.  The Fed : The market moves in the past four weeks are about risk off in many sectors such as technology and financials that have heretofore been over-inflated. With the 10-year Treasury around 4% yield, President Trump has gotten his rate cut earlier than expected, but how long will this rally last? Remembering that Fed Chairman Jerome Powell  held essentially a symmetrical view of monetary policy in the last press conference, a market rally could also see rates move higher if the FOMC does nothing. Credit : In our last call, we mentioned our astonishment at disclosures that Bank OZK (OZK)  and JPMorgan Asset Management somehow became involved in two separate development projects in the Chicago area. OZK has since seized part of the moribund Lincoln Yards project . We also noted that the Trump Administration is planning to roll back many COVID era forbearance schemes, including for distressed assets guaranteed by the Veterans Administration and FHA, that will result in a significant increase in visible delinquency and the financing costs related to default servicing. More generally, festering consumer delinquency in many markets, combined with lower GDP estimates, are likely to push up credit expenses in Q1 and the rest of 2025.  The Universal Banks Like the commercial banks and consumer lenders that we profiled in the past two weeks, the universal banks have seen strong market results and flat to down credit expenses, with the exception of the largest –  Goldman Sachs (GS) . By comparison,  Morgan Stanley (MS)  and the other members of our asset gatherers group saw lower credit expenses in 2024, but this is likely to change in Q1 given market conditions. Wall Street is expected to do well on trading due to market volatility, but will be light on investment banking and other lines. Remember that market volatility can work both ways. Given the increase in high-yield credit spreads and the cessation of new issue activity in March, it is a pretty good bet that the investment banks will miss revenue estimates and see higher credit expenses.  Source: FFIEC Note in the chart above that GS continues to report outlier credit losses that are 3x the average for Peer Group 1 and roughly equal to JPM dollar-for-dollar of assets. GS has a gross spread on its loan book over 11% vs 7% for JPM, a stunning illustration of the two business models. Yet the GS stock continued to defy gravity and outperform its larger peers last year. During the Q4 2024 earnings call, GS revealed that it closed on the sale of GreenSky home improvement lender, entered into an agreement with General Motors (GM)  to transition their credit card program and sold a portfolio of self-financing loans.  After getting shellacked in retail banking and white label credit cards, GS now wants to expand their loan offering to private wealth clients. The key question, however, is whether GS can reduce credit expenses after exiting the disadvantageous credit card relationship with Apple (AAPL) . GS saw provision for credit losses at $351 million in Q4, primarily driven by net charge-offs in the credit card portfolio and balance growth, partially offset by reserve releases in the wholesale portfolio. The following exchange on the Q4 conference call illustrates the problem: Mike Mayo: “Why is Platform Solutions still around? I mean, you're number one in deal making, and you haven't been able to work that out. And on the other hand, the financing, organic growth, how big is that today? And how big do you expect that to be in five years? And what about credit risk that's related to that? Thanks.” David Solomon: “Yes. On the first question, I don't really have anything to say that's different than what I've said about, our journey around the consumer platforms in the business, but I appreciate the question. On the second point, we continue to believe that there's opportunity for us to grow our financing business. Our financing business scales with growth in the world. Of course, we're incredibly focused on risk management, and credit risk, and the scale of that business against our equity base and our balance sheet, et cetera. But as the world grows, we believe there's opportunity for us to continue to grow and scale that business. And I think we've proven that over time.” Proxy adviser Glass Lewis recommended investors cast advisory votes against the pay of top Goldman Sachs , citing the Wall Street bank's "continued inability to align pay with performance" and retention grants that Glass Lewis called excessive. But the poor performance of the firm comes from more than bad management decisions. Both JPM and GS are saying, in different ways, that they don’t find sufficient demand for their products. A larger question facing GS and the other members of the group this year, however, is market conditions and a likely shrinkage in new issue market volumes. With bearish sentiment outpacing the bulls for the first time in several years and the overall allocation to stocks falling below 70% for individual investors for the first time in five years, the capital markets are clearly positioned for a correction. Indicators of equity market breadth are still far from showing any signs of a bottom.  Meanwhile, there is a growing consensus among business executives that the US economy is weakening rapidly, suggesting that a further decline in equity market valuations is likely. "The economy is weakening as we speak," BlackRock CEO Larry Fink told Bloomberg , adding that he foresees more of an economic slowdown in the coming months. Such sentiments suggest to us that credit costs for consumer and commercial obligors are likely to rise sharply in 2025. The decline in global equity markets will result in a proportional decline in assets under management and thus fees, so we would anticipate a softening in non-interest earnings from most banks involved in advisory business. Basically the increases in AUM seen in 2024 have been wiped off the books, leaving a lot of the firms in our surveillance group scrambling. Fortunately, our group tends to be very attentive to managing their balance sheets and keeps duration short and market risk very low. The US banking industry took $16 billion in losses on securities last year vs $12 billion in 2023 and $4 billion in 2022.  Source: FFIEC Guidance for Q1 delivered in the first two weeks of January is not going to be very helpful given the market roller coaster that has seized the financial markets. Not only have broad equity market gains been wiped off the table, but sectors such as technology and new offerings have been decimated. The chart below shows the NYSE composite index and the Invesco KBW Bank ETF (KBWB) . Source: Yahoo Finance Notice in the chart above and also the table below sorted by 1 month returns that Charles Schwab (SCHW)  is outperforming the group on the way down. But GS leads the group measured by 1 year total returns, a reflection of how well the GS common performed last year compared to other large banks. Source: Bloomberg (04/07/2025) In Q4 2024 earnings, the whole group showed rising income, led by Raymond James Financial (RJF) , Ameriprise Financial (AMP) , Stifel Financial (SF) . Notice that SCHW, MS and then GS are at the bottom of the range in terms of on-balance sheet asset returns. Source: FFIEC The balance sheet assets of the group are likely to remain stable, but the decline in the global equity markets will lead to a decline in AUM and thus fee income. Market volatility should continue to be a source of revenue for this group, but a lack of new issue activity due to political uncertainty and interest rate volatility is a negative going forward. New issuers such as buy now, pay later platform Klarna and online ticket seller StubHub have both delayed IPOs . The value of IPOs in 2025 so far is on track to underperform the average year of the past decade, while the number of deals so far is higher but of decidedly low quality. “Right now, our outlook is a little bit negative,” Avery Marquez , a portfolio manager for IPO-focused ETF provider Renaissance Capital, told Yahoo Finance . The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

April 10, 2025  | Premium Service  | This is a special note for Annual Plan  subscribers to The Institutional Risk Analyst . We’ll be sending out a placeholder for the next live subscriber conference call next week.

April 17, 2025  | Premium Service  | A number of readers have asked us about what happens to financials and the broader markets under President Donald Trump ? The answer is remarkably consistent with the basic view of markets and the economy prior to November of last year. The new addition of tariffs to the narrative has everyone’s attention, including economists and members of the Federal Reserve Board, but these same observers have been calling for a recession that has not materialized.

April 22, 2025  | Premium Service  | Updated | Last week we put down the obvious long gold, short dollar trade. The markets continue to reject the America-first agenda of the Trump Administration, but we suspect that a lot of this fuss comes from shock after years of excessive monetary ease by the Federal Reserve Board. Time to wake up from the long QE slumber kiddies. In fact, President Donald Trump’s trade offensive is entirely successful in terms of marginalizing China, at least judging by Beijing’s increasingly shrill threats of retaliation against nations that cut deals with Washington. Isolating communist China was always the point of Trump's trade offensive. Below for the benefit of annual subscribers to our Premium Service , we report on some of the more interesting developments in Q1 2025 earnings and also the market conditions as mortgage companies start to report this week. But first let’s talk about the sophomoric media commentary swirling around the public spat between President Donald Trump and Fed Chairman Jerome Powell .  As we note in our upcoming book Inflated: Money, Debt and the American Dream , Presidents always think that they can control Fed governors, but the control ends as soon as the individual is appointed and is then confirmed by the Senate. The next Fed Chairman is likely to be far less disposed to provide excessive liquidity to markets, perhaps the more cogent observation to make about the Fed post-Jerome Powell.   President Trump will not try to fire Chairman Powell, as he confirmed after this edition of The IRA was published . Why not? First, Presidents appoint Fed chairmen, but they are confirmed by the Senate and thus can only be removed via impeachment. Second and more important, firing Powell will seriously piss off Senate Republicans, killing President Trump's hopes for tax legislation this year. And to add to the stakes, Treasury Secretary Scott Bessent would likely resign if Trump disregards his advice on dealing with the Fed. Rather than speculate about whether the Fed under a new chairman would cut the target for short-term interest rates, maybe we should ask whether the next more conservative Fed Chairman will support expansion of the Fed’s balance sheet in the face of massive fiscal deficits. Keep in mind that President Trump could have tried to fire Powell in January, but advisers from Treasury Secretary Bessent on down are urging caution. Trump knows that if he tries to fire Powell, he loses any control over the Senate and that means no tax cuts.   Leaving aside the latest Trumpian tantrum about interest rates, the bigger point to make is about the nature of the central bank. Just as William McChesney Martin ultimately betrayed President Harry Truman after his appointment in 1951, Donald Trump will lose control of his choice to replace Jerome Powell on day one.  And if Trump is not careful with his public comments, Powell may just remain on the Fed Board for the rest of his term as governor through January 2028. This will force Trump to select the new chairman from among the existing governors. We kind of like the idea of Chairman Michele "Miki" Bowman. So far, Q1 2025 earnings are about what we expected with flat to down interest income and funding costs, but oversized volumes and some gains from market volatility.  Bank of America (BAC) , for example, reported flat net interest income but a $2 billion jump in sequential non-interest income.  The table below is from BAC's Q1 2025 supplement. Perhaps more significant, BAC saw both interest earnings and funding costs fall dramatically in Q1 2025, but the net interest income was unchanged. Credit provisions were up small, similar to many other large banks. But the bank's balance sheet remains significantly under water. The yield on BAC’s $923 billion in securities (roughly half of the balance sheet) was below 3% as of Q1 2025. Fannie Mae 3% MBS are trading at 84-31 this AM. As we have noted previously, BAC is in a precarious position in the event that credit costs and/or LT interest rates rise.  Of note, BAC has just lost a litigation with the FDIC over underpayment of insurance assessments between 2012 and 2014, thus a $450 million expense may be hitting the bank's income later this year.  FDIC had originally sought more than $2 billion in insurance assessments and interest from BAC, Bloomberg  reports, but the court ultimately disallowed claims by the FDIC prior to 2013.  U.S. Bancorp (USB)  also saw net interest income down in Q1 2025, but the bank’s operations continue to improve overall as USB digests the 2021 acquisition of Union Bank of California. Like BAC, credit provisions were down vs Q4 2024. Perhaps more significant, USB has shaved six points off of its operating expenses over the past year. At Q1 2025, USB had an efficiency ratio of just 60%, well-below most of its peers but still nine points above industry leader JPMorgan Chase (JPM) . The table below is from the Q1 2025 earnings supplement from USB. Another important bellwether for the banking sector is M&T Bank (MTB) , a $200 billion asset bank holding company based in Buffalo, NY, which is actively involved in the residential mortgage space. Like its peers, MTB saw interest income down vs Q4 2024 but basically flat YOY.  And credit loss provisions were down small vs Q4 2024 and almost 30% YOY. The table below is from the Q1 2025 earnings of MTB. Of interest to our readers who follow the mortgage sector, in the MTB earnings announcement there was the following remarkable disclosure regarding Bayview, one of the leading managers of residential mortgage assets: "The recent quarter decline in noninterest income reflects a distribution from M&T's investment in Bayview Lending Group, LLC ("BLG") and net gains on bank investment securities each in the final quarter of 2024." We asked the folks at MTB for a translation. Here is their response: "M&T holds a 20% minority interest in Bayview Lending Group “BLG,” a privately held commercial mortgage company. Bayview Financial, a privately held specialty finance company, is BLG’s majority investor. Periodically BLG makes cash distributions to M&T and Bayview Financial, typically in the first quarter of the year. BLG made cash distribution in 1Q24 and an additional distribution in 4Q24, but did not make a distribution in 1Q25. Cash distributions received from BLG are recognized as income by M&T and included in other revenues from operations in the Consolidated Statement of Income." What does this mean? There have been reports in the press that Bayview is looking to raise money. Monetizing the equity of a manager, any manager, is really hard. Since Bayview manages Lakeview, the second largest residential mortgage servicer in the US after JPM, the fact that the manager is looking to raise money and apparently omitted a payment to MTB in Q1 2025 seems significant. Bloomberg's Gillian Tan reported last week: "Bayview Asset Management, a credit firm that oversees $20 billion, is exploring liquidity options including the sale of a minority stake, according to people with knowledge of the matter. The firm, led by chairman and Chief Executive Officer David Ertel, may consider other options including raising capital through a net-asset-value, or NAV, loan, said one of the people, all of whom asked not to be identified discussing private information. No final decisions have been made, the people cautioned." The fact that Bayview is in need of new capital seems to coincide with very difficult bond market conditions in Q1 2025. Is Bayview for sale? Media reports indicate that Bayview Asset Management is exploring a sale of a minority stake. The firm, which oversees $20 billion in assets for institutional investors, is also reported to be considering other liquidity options, including a net-asset-value (NAV) loan and/or the sale of Bayview's insurance arm, Oceanview Holdings . Industry observers tell The IRA that Q1 was particularly ugly in terms of hedge results for mortgage servicing rights (MSRs).  MTB is actively involved with financing the operations of nonbank mortgage firms, which are starting to release results this week. Nonbank mortgage sector leaders PennyMac Financial Services (PFSI)  and Mr. Cooper (COOP)  report earnings tomorrow.  Stay tuned. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

April 30, 2025  | Premium Service  | As we prepare to rebalance the WGA Bank Top 100 Index this week, one of the best performers of the group, SOFI Technology (SOFI) , has just reported earnings. SOFI is a bank, but not. It prefers to describe itself as “a member-centric, one-stop shop for digital financial services that helps members borrow, save, spend, invest and protect their money.” What's not to like? Much of the SOFI disclosure seems to be IR hype focused on the company’s image as a fintech platform, but the bottom line for many investors is double-digit growth in assets, loans and deposits. Finding meaningful information in the hyperbolic SOFI disclosure is a challenge. The company's focus on earnings before interest, depreciation and amortization (EBITDA), for example, is not particularly relevant to a bank or financial company that uses leverage. The cost of funding is obviously relevant to investors in banks, but at least SOFI does highlight net interest margin and the steady progress toward building a deposit base, as shown in the graphic below from the Q1 2025 presentation. For example, interest expense rose in Q1 2025. SOFI states: " The income tax expense recognized in both years was primarily attributable to the Company’s profitability and discrete tax benefits for stock compensation recorded in each quarter." The income statement on Page 13 of the press release shows that rising marketing and overhead costs actually drove net income down in Q1 2025 vs the same period in 2024. Since the last thing that Wall Street equity managers want to see in an emerging fintech is profitability, the decline in earnings is probably positive for the stock. Like many other banks in Q1 2024, SOFI saw credit costs fall this quarter. Fees for loan originations and servicing also fell, but loan platform fees jumped $80 million vs Q1 2024. SOFI provides just bare bones financials in their press release, so there is no sequential balance sheet and income statement data.  While it is clear why equity managers like SOFI, we are reminded of how PayPal (PYPL)  and Block (XYZ)  fell out of favor after achieving profitability. In the case of SOFI, however, we have two specific concerns. First, the portion of revenue that is being consumed by overhead costs is excessive. In 2024, overhead costs were over 90% of net interest income and non interest income vs 63% for Peer Group 1. The retort, of course, is that the bank needs to grow, but at $36 billion in assets the bank should be more profitable. How big does SOFI need to be in order for overhead costs to fall into line with comparable companies? Source: YahooFinance Our second concern is credit. Overall, credit expenses were down in Q1 2025, along with the rest of the industry, but the bank still reported 330bp of net losses on the bank’s $18 billion portfolio of personal loans. If we covert 330bp into a bond equivalent rating, that suggests a “BB/B” rating for the SOFI consumer book. This is just below the net loss rate for CapitalOne (COF) . If we include the delinquent loans sold by SOFI, however, the net loss rate on consumer loans is close to 5%, which is a solid "B" rating equivalent. The table above and the chart below come from the SOFI Q1 2025 presentation. SOFI indicates that loan sales are accretive and that the sale of delinquent loans with servicing retained is also a source of profitability. SOFI is known among institutional investors as a student lender, but its biggest area of growth and risk is credit cards and unsecured consumer loans. Credit cards at SOFI were reporting almost 11% of net charge-offs in Q1 2024, a loss rate that compares with COF and other, more aggressive consumer lenders.  Source: FFIEC CEO Anthony Noto focused most of his comments to investors in Q1 2025 on the SOFI loan platform, but given the anemic volumes in the lending market, we think credit is more relevant area for discussion. T he overall loss rate for the SOFI credit book is very low and the overall net loss rate reported in the Form Y-9 is also low, as shown in the chart above. But the levels of net loss on the bank's unsecured consumer loan book are eye-opening. As and when credit costs actually start to rise among US banks, the unsecured consumer book of SOFI may become a larger concern. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

May 5, 2025  | Premium Service  | The new edition of “Inflated: Money, Debt and the American Dream,” is being released on Tuesday of this week . The second edition features a lot of original content throughout the book and a new introduction by David Kotok of Cumberland Advisors.

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 Markets were distracted during Q1 by the trade policy of the Trump Administration, but the fact is that the belly of the Treasury yield curve rallied strongly into the end of the quarter, then shot back up. The movement of the yield curve accounted for much of the hedge cost to lenders, both for loan pipelines and MSRs. Why do we hedge MSRs? To keep institutional investors happy. The result was a lot of down marks for MSRs that were made more prominent by low volume levels. In the last two weeks of March, 30-year conforming mortgages for the FHA market just touched 6.2% but then soared in April back up to 6.6% and conforming assets were near 7%. This level of volatility makes it difficult to price loans and even more difficult to model MSR prices. GHLD surged at the end of Q1 2025, but then sold off as Q2 2025 began, as shown in the chart below. UWMC has performed poorly compared to its peers through all of 2025. GHLD swung from an $80 million positive mark for its MSR in Q4 2024, but then reported a $70 million negative mark in Q1 2025. Some $50 million of this adjustment reflected model inputs. While volumes fell in Q1 2025, profitability per loan improved. Mr. Cooper (COOP)  displayed the same drop in volumes but improvement in profitability. Less is more. The table below shows the Q1 2025 income statement for GHLD.  Guild Holdings Total originations for GHLD fell 23% in Q1 2024, reflecting the volatility in interest rates and the end of the surge in lending in Q3 2024. The firm reported a loss of $23 million in Q1 2025 vs a profit of $97 million in Q4 2025. Yet when the GAAP results are adjusted to eliminate the non-cash charges, GHLD actually made more money in Q1 than in Q4. Likewise, GHLD generated more operating cash flow in Q1 2025 than in Q4 2024, again illustrating the difficulty of parsing financial statements for mortgage lenders. The table below shows the non-GAAP income for GHLD. While GHLD provides a lot of good information about their business, the investor disclosure provided by UWMC is a bad joke, especially when you remember that UWMC is the largest nonbank lender in the US. The Q1 2025 press release is just 9 pages in length and lacks some of the most basic financial information available from UWMC’s peers. Yo Matt: Give us a proper five-year financial supplement, like Citi or even Block Inc (XYZ) . The table below shows the summary income statement for UWMC from Q1 2025 earnings. Note that UWMC lost $250 million in Q1 2025 on a GAAP basis, but still was in the red $150 million after making non-GAAP adjustments. Like many lenders, UWMC saw its gain margin on loans drop 10bp, but UWMC does not use industry standard terms for reporting gain on sale. Operating cash flow fell from $118 million in Q4 2024 to just $50 million in Q1 2025. The big event in Q1 was the $388 million down mark on the firm’s MSR. The statement of operations for UWMC for Q1 2025 is shown below. As you can see from the table, UWMC has a lot of moving parts, starting with the changes in the valuation of the MSR. UWMC has been selling MSRs for the past several years to finance a brutal price war with RKT in the wholesale channel. Notice the large swings in the firm's gains and losses on interest rate derivatives, a line item that thankfully has been eliminated in Q1 2025. But the bottom line is that the company lost a quarter of a billion dollars in the last quarter and the stock's performance reflects this reality. The float on UWMC is thin and thus it is difficult for the firm to get credit for its market position. Less volume, more profits and retention of MSRs would be well-received. Both GHLD and UWMC face significant challenges in the future. In the wake of the transactions by Rocket Mortgage (RKT) to acquire Redfin (RDFN) and then Mr. Cooper, all of the top residential mortgage lenders are facing a decision. What is that decision: How to compete with the two dominant seller servicers: JPMorgan (JPM) : The largest bank servicer at $1 trillion UPB and $9.1 billion in retained MSR, the industry leading mortgage warehouse and prime residential securitization platform, and over a trillion in core deposits and gazillions more cash in escrow balances. JPM has a taste for prime loans and the raw market power to set prices in non-QM. Led by JPM, the top five money center banks dominate the top half of the conventional mortgage market and most of jumbo loans. U.S. Bancorp (USB) is right behind JPM in correspondent volumes. BAC, WFC and Citi all churn out significant volumes primarily via their branch system. If the banks want the jumbo condo loan in a given market, they'll get it. RKT+RDFN+COOPER: This promises the creation of an integrated nonbank loan acquisition machine that includes a national realtor to gather prospective borrowers, the number two player in wholesale and direct to consumer right behind UWMC, and the low-cost provider of servicing and asset management in COOP. The post-close Rocket will be the biggest nonbank owned servicing and subservicing provider, with above peer recapture capability and direct to consumer channels, and nascent asset management capacity acquired in 2023 with Roosevelt Management. COOP does not mind some Ginnie Mae exposures, but it is closely aligned with RKT in terms of the view of risk vs reward. And RKT has not followed UWMC into the black hole of overpaying for business in the belief that any advantages last beyond today. When Matt takes his hand off the throttle in wholesale, he knows that RKT could easily pass him in loan volumes. GHLD needs to grow, probably by combining with another lender with a larger servicing book. GHLD's MSR represents less than $100 billion in unpaid principal balance (UPB) of high quality purchase loans. COOP plus RKT is well over $1.5 trillion in UPB. In our view, any national mortgage firm with less than $500 billion in UPB of servicing is not viable long term. GHLD is acquisitive and has a skilled, stable management team that is laser focused on cost control. To date they have mostly acquired smaller firms, but GHLD could easily combine with one or more mid-size firms to create an impressive competitor focused on high touch purchase business. UWMC and other large lenders face a different problem, namely acquiring additional servicing assets, long-term debt and also asset management capability to raise more capital. The idea of UWMC getting into servicing de novo, for example, is ill-advised in our view, but an acquisition makes a lot of sense. There are several firms in the top 20 servicers that could give UWMC the servicing capacity they need for the next round of competition. UWMC is a classic example of a hyper-efficient lender that has focused on making and selling loans. But the industry of the future is not just about sales, but looks more and more like the moated castles such as JPM and RKT, which control so many assets and cash flows that they essentially become self-sustaining systems. For that reason, we like the firms that hold MSRs and have the tools to build toward that trillion dollar level of servicing UPB, which is still less than 10% market share in a $14 trillion UPB residential mortgage market. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. 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