KBRA Financial Intelligence

Mortgage Rate Rebound May Weigh on Sales and Spark Delinquency Concerns

After a steady decline through September, mortgage rates have reversed course. The average rate on a 30-year fixed mortgage, which fell to a two-year low below 6.1%, climbed 64 basis points (bps) in October, reaching over 6.7%. That represented the first monthly increase since April and the largest in over two years, as noted in KFI's earlier analysis. Despite the rate rebound, data from the National Association of Realtors (NAR) shows resilience among buyers. Existing home sales posted their second-largest month-over-month (MoM) increase of 2024 in October, suggesting that demand, while tempered, has not been entirely deterred by rising borrowing costs. In contrast, new home sales went in the opposite direction, falling to their lowest level in nearly a year. The monthly decline hit 17.3%, the steepest drop recorded since 2013.

Mortgage Rates Bounce, Adding Pressure to Homebuyers

Mortgage rates have continued their upward trajectory into November, with the average rate rising an additional 12 bps during the first three weeks of the month. While October saw a marked improvement in home sales compared to the prior month, persistently elevated mortgage rates could discourage prospective buyers who may prefer to delay purchases in hopes of more favorable borrowing conditions. KFI’s September analysis of the residential mortgage market highlighted trends in 2Q 2024 data. New 3Q 2024 data shows that the total mortgage value held by U.S. banks increased 1.9% year-over-year (equivalent to approximately $53.9 billion). This marks the second-smallest annual increase over the past two years, with net mortgage growth lagging behind total loan volume growth for the first time in seven quarters.

Among more than 4,400 commercial and savings banks reporting residential mortgage holdings for 3Q 2024, the average residential mortgage delinquency rate ticked up slightly to 1.42%, versus 1.39% in the previous quarter. While this remains 16 bps below the five-year moving average, the quarter-over-quarter (QoQ) increase reflects the narrowest spread since 1Q 2020.

Rising Delinquency Risks Amid Persistently Slow Mortgage Inflows

While the increase in mortgage delinquencies has been modest so far, a sustained slowdown in new mortgage originations and acquisitions could contribute to higher delinquency rates. As the average age of loans in a portfolio increases, delinquency risks may rise because older loans generally carry a higher likelihood of financial strain. Borrowers who were creditworthy at the time of origination may face financial challenges over the life of their loan, increasing the potential for delinquency. Additionally, high-quality borrowers often prepay or refinance their loans, leaving a greater concentration of higher-risk loans in the portfolio when new inflows of mortgages slow.

Although the average 30-year mortgage rate has remained above 6% for two years, most U.S. homeowners secured their loans at much lower rates. The Federal Housing Finance Agency’s (FHFA) National Mortgage Database shows that the average rate on outstanding mortgage loans was just 4.2% in 2Q 2024—the most recently available data. This disparity between current market rates and the lower rates held by existing homeowners creates a significant barrier to home sales growth. Many potential sellers are reluctant to trade in their favorable rates for higher ones tied to new purchases, further reducing housing market activity.

Supply-side constraints exacerbate the issue, as tight housing inventory keeps prices elevated, pricing out a growing number of would-be buyers. This dynamic not only limits sales growth but also poses challenges for the broader housing market in the near term.

Delinquency Trends Among Banks With Large Mortgage Portfolios

If we narrow the field of banks to the 209 banks with more than $1 billion in mortgage loans, the average delinquency rate is only slightly higher than the average of all U.S. banks at 1.51%. Though the rate of delinquency appears to increase significantly among the largest holders of mortgage debt, with 33 banks carrying more than $10 billion in residential mortgage loans experiencing an average delinquency rate of 2.4%, this average is somewhat skewed by the particularly high rate of delinquency among MidFirst Bank’s (KFI Score: B+) mortgage loans. Excluding MidFirst Bank from the >$10 billion residential mortgage cohort brings the average rate of delinquency among the remaining 32 banks down to 1.6%. That is roughly in line with HSBC Bank USA, National Association (KFI Score: B-), which has a similarly sized portfolio of residential mortgage loans as MidFirst in dollar terms, yet these loans form a smaller share of the former’s total loan book. While the delinquency rate impacting MidFirst’s mortgage loans increased in 3Q 2024 by 153 bps QoQ, HSBC Bank USA’s eased by 17 bps.

Among the cohort of banks with $1 billion-$10 billion in residential mortgage loans, Flagstar Bank (KFI Score: E) is experiencing the highest delinquency rate, but only 11.9% of its loans are concentrated in residential mortgages. At the other end of the spectrum, Guardian Savings Bank (KFI Score: A-) has a ratio of residential mortgage loans to total loans of 92.5%, as well as a delinquency rate of just 0.4%.

Individual banks and credit unions can be sorted by the delinquency rate of various loan categories using the Data Wizard in KFI’s Excel plug-in, as well as the Loan Category & Delinquency Report template from our Template Library. To access our full library of tables and templates, request a demo with KFI.