As interest rates go down, home sales will undoubtedly go up.
While most banks are handling their mortgage loans very well, there are always exceptions. Bauer is closely watching for any cracks in both residential real estate loan concentration and quality.
This week we are concentrated on banks that have been struggling with mortgage loan quality. Our hope is that lower rates will be a help to them, but we will maintain a close eye, either way.
Home Sweet Home Loans to Watch
According to the National Association of Realtors® (NAR), home sales increased across the country during the 12 months ended August 31, 2025. That is a sharp contrast to what we reported in February (JRN 42:05) “in spite of an upturn in the 4th quarter, sales of existing homes in 2024 fell to their lowest level since 1995 (29 years ago).” With interest rates finally heading down, we are hopeful that this is the beginning of a new trend.
In addition to mortgage loan volumes, we are looking closely at mortgage loan quality. The Mortgage Bankers Association’s (MBA) assessment of second quarter mortgage performance indicates that the composition of past due mortgages has changed in the past year. “Earlier-stage delinquencies declined while serious delinquencies – those loans 90 or more days delinquent or in foreclosure – increased,” according to Marina Walsh, CMB, MBA’s Vice President of Industry Analysis.
This same MBA survey reported: “The five states with the largest quarterly increases in their overall non-seasonally adjusted delinquency rate were: Mississippi (42 basis points), North Dakota (42 basis points), Ohio (40 basis points), Michigan (38 basis points) and West Virginia (36 basis points).”
While most banks are handling their mortgage loans very well, on page 5 of this week’s issue of Jumbo Rate News, you will find 50 banks that Bauer is watching closely for cracks in residential real estate loan concentration and quality. Each has a Bauer Star-Rating of 3½-Stars or less, a loan portfolio comprised of at least 25% residential real estate loans with at least 1.5% of those residential real estate loans in some form of delinquency status.
Many of the banks listed were also included in JRN 42:05, but some are new additions. 2-Star Gateway Bank F.S.B. – Oakland, CA (33103), for example, is a new addition. Gateway Bank was established in 1990 to serve the community of Oakland’s Chinatown. Today, it boasts assets of $246 million of which, $182 million is in the form of loans. Over 77% of those loans are for residential real estate. (That’s more than double the percent of its peer group.)
While helping neighbors and friends achieve the American Dream is a very worthy goal, it must be achieved with prudent underwriting. At June 30, 2025, nonaccrual loans and other loans 90 days or more past due accounted for more than 20% of Gateway Bank’s net worth. That’s a lot. Its peers reported that those same loans accounted for less than 5% of net worth.
Over 55% of Gateway Bank’s first mortgage loans are adjustable rate mortgage loans (ARMs). We will be watching to see if these loans start performing better as rates go down on these mortgages.
Another new addition to page 5 is 2-Star First Bank and Trust Company of Murphysboro – Murphysboro, IL (3818). A tiny bank in a tiny city of about 7,000 residents, Murphysboro, Illinois was a coal mining town in the 19th century and the first half of the 20th century. First Bank and Trust was established in 1889 to service the mine workers and their families.
First B&T has been operating under an enforcement action for a year and half that requires a leverage capital ratio of 9% (it is currently 8.9%) and a total risk-based capital ratio of 12% (currently 15.1%). The order also called for a reduction in delinquencies. Residential real estate is not the only loan sector in the weeds at this bank. Nonaccrual loans and other loans 90 days or more past due accounted for more than 28% of net worth at this bank (higher than Gateway’s).
Based on June 30, 2025 financial data, First B&T has total assets of just $85 million. Of that, $54 million (63.5%) was in the form of loans. Thirty-eight percent of its loans are residential real estate and 4.2% of those are delinquent. Its total nonperforming loans to tangible assets ratio is 5.65%. It has a long way to go to meet the requirements of the action, and we only mentioned a few of them.
2-Star Bank of Frankewing – Frankewing, TN (1484) (pronounced Frank Ewing, named after the man who was instrumental in getting the railroad to run through the town) did appear on this list last time and appears to be heading in the wrong direction. In the past three quarters, Bank of Frankewing has decreased its assets, net worth, deposits, loans, and even employees. These reductions can be attributed to an enforcement action of its own, dated last October. In addition to higher capital ratios, Bank of Frankewing was required to address the quality and concentration of its loan portfolio.
By June 30, 2025, Bank of Frankewing had total assets of $490 million of which $340 million was in the form of loans. While only 35% of loans are for residential real estate, 9% of those home loans are delinquent. To its credit, Bank of Frankewing decreased its home loan volume by 14% in the past year. Also, almost 70% of these loans are ARMs which may perform better as rates go down.
It will need to see significant improvement in overall loan quality, however. Nonaccrual loans and other loans 90 days or more past due accounted for more than 46% of net worth at this bank. That’s, by far, the highest of the three.
Moving on to another Ewing, 3½-Star Cenlar Federal Savings Bank – Ewing, NJ (30996) is another animal altogether. With $876 million in total assets, only $130 million of which are loans, Cenlar FSB is a real estate lender… to exclusion of all other loans. Its capital ratios are higher than most and it is profitable. However, Cenlar Bank’s delinquent residential loans are 3.8% of the total. That puts it on this list, but we are not concerned. With a leverage capital ratio of 15.5, even removing all delinquent loans from the equation, Cenlar Bank still has a Bauer’s adjusted capital ratio of 15.43% and a Texas ratio of 0.55%.
What’s more, 77.5% of Cenlar’s loans are ARMs, which as we have already mentioned, may perform better as rates go down.
