The Small Balance Intersection Update - September 27, 2024

Credit Risk Ahead

Delinquency Rates Rise Across Consumer Credit Products

TransUnion’s August 2024 Credit Industry Snapshot reports a broad increase in consumer delinquency rates across most credit products, with the exception of mortgages, where delinquency levels have decreased. Auto loan delinquency rates worsened, with 30+ days past due (DPD) rising to 4.32% (up 20 basis points) and 60+ DPD climbing to 1.60% (up 7 bps). In the bankcard sector, consumer 30+ DPD rose to 4.55% (up 12 bps), while 90+ DPD hit 2.31% (up 9 bps), reflecting heightened financial strain. Unsecured personal loan (UPL) delinquency for 60+ DPD increased to 3.44% (up 11 bps), although the average new account loan amount saw a modest increase to $6,824. Mortgages showed improvement, with 30+ DPD dropping to 2.25% (down 18 bps) and 90+ DPD declining to 0.70% (down 3 bps). Balance growth continued in the bankcard and mortgage segments, with average balances rising to $6,344 and $226,530, respectively. Consumer sentiment remained weak, as evidenced by the University of Michigan’s Index of Consumer Sentiment at 67.9, a 2.3% year-over-year decline, influenced by subpar job growth and an unemployment rate that has increased to 4.2%. Despite inflationary pressures easing, rising delinquencies and persistent consumer caution indicate a challenging credit environment for lenders.

Source TransUnion

Resiliency Road

Small Multifamily Sector Bounces Back Amid Rising Cap Rates

The small multifamily sector demonstrated resilience in Q3 2024, despite ongoing macroeconomic challenges, with originations projected to increase by 7.9% annually. This modest rebound follows a period of slower lending activity, driven by elevated interest rates and conservative credit conditions that pushed debt yields to 9.9%. Cap rates rose to 6.1%, reversing earlier declines and improving potential returns for investors, although asset valuations fell by 1.5% year-over-year, and 11.2% from their 2022 peak. Despite these valuation declines, asset prices remain 19% higher than pre-pandemic levels, reflecting the sector's long-term strength. Strong demand continues to support occupancy rates, which rose to 97.1%, a 45-basis-point improvement over the prior quarter, with small multifamily properties routinely outperforming the broader market by about 2%. Expense ratios have stabilized at 40.4%, following a peak in early 2023, and suggest the sector's financial fundamentals remain solid.

The spread between cap rates and 10-year Treasury yields widened slightly to 160 bps, indicating an increasing risk premium, though it remains well below pre-pandemic trends. In comparison, the debt yield-cap rate spread reached 383 bps, the highest in over a decade, underscoring rising borrowing costs. Multifamily completions hit a five-decade high, while rents grew 2.7% year-over-year through June 2024, pointing to sustained market momentum, albeit with room for further growth. Lending volume is stabilizing, with small multifamily originations on track to reach $48 billion by year-end, aided by loan extensions and borrower-lender collaboration to manage distress. Looking ahead, a potential Federal Reserve interest rate cut could further unlock borrowing activity, helping to bridge the gap between buyers and sellers. The ongoing U.S. housing shortage, with 3.5 million more households than new unit completions, ensures sustained multifamily demand, positioning the sector for continued growth through 2025.

Source: Small Multifamily Investment Trends Report Q3 2024" published by Arbor Realty Trust and Chandan Economics

Read the full report here.

Builder’s Boulevard

New Home Sales Dip Amid Rate Cuts, But Builder Confidence Rises

In August 2024, new home sales fell 4.7%, bringing the annualized pace to 716,000 units, reversing the 10.3% jump seen in July. Despite the monthly dip, sales remain robust, with a 9.8% increase year-over-year and a 4.0% rise year-to-date, as builder pricing incentives and a scarcity of available existing homes continue to drive demand. Lower mortgage rates are expected to further support home sales, with the average 30-year fixed mortgage rate falling to 6.09% in mid-September, the lowest since February 2023. The Federal Reserve's recent 50-basis-point rate cut in September has bolstered buyer interest, improving affordability, and builder confidence. Reflecting this, builder sentiment increased for the first time in four months, driven by better buyer traffic and positive sales forecasts.

In August, the median price of new homes dropped to $420,000, a 4.6% decline from a year earlier, which may also help sustain demand amid affordability concerns. Inventory levels increased to 467,000 units, providing 7.8 months of supply at the current sales pace, though still below 2008’s highs. With more inventory available, new home sales remain stronger than the resale market, where inventory is more constrained. However, challenges remain, as a softer labor market and persistent affordability issues could limit a robust rebound. Nonetheless, the share of builders cutting prices fell to 32%, with average price reductions dipping below 6% for the first time since July 2022, reflecting optimism about future demand.

Read the full Wells Fargo report here.

Proceed With Caution: Fraudsters Alert

Over 100 Charged in COVID-19 Relief Fraud, $96 Million Targeted

Since the onset of the COVID-19 pandemic in March 2020, the U.S. Attorney’s Office for the Middle District of Florida (USAO-MDFL) has aggressively targeted pandemic-related fraud, resulting in charges against 109 individuals. These defendants exploited state and federal relief programs such as the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDL), Unemployment Insurance (UI), and other government initiatives like the Main Street Lending Program (MSLP) and the Emergency Rental Assistance Program (ERAP). Collectively, these fraudsters attempted to defraud the government of over $96 million in relief funds. So far, 74 defendants have been convicted, while prosecutions remain pending for the other 35 individuals.

One recent case involves Angela Chew, a Small Business Administration (SBA) loan specialist convicted of bribery and wire fraud for approving fraudulent EIDL applications in exchange for payments, causing over $800,000 in losses. Another notable case involves Jared Dean Eakes, who fraudulently secured $4.75 million in PPP loans by submitting false information about employees and payroll. In addition to criminal cases, the USAO-MDFL is pursuing civil actions, including a $2.28 million settlement with Miles Partnership, a Sarasota-based consulting company, over improperly obtained PPP funds. Moreover, the office has successfully recovered over $20 million in fraudulently obtained funds, with an additional $18 million pending forfeiture.

The USAO-MDFL continues to collaborate with various federal, state, and local agencies through the COVID-19 Fraud Task Force to pursue individuals and entities engaged in pandemic-related fraud. The source document details the names and crimes of all 109 individuals charged, illustrating the breadth of the fraud and the legal system's robust response to it. The public is encouraged to report any suspected fraud to the National Center for Disaster Fraud. Full Report Here