With unemployment expected to rise by a small amount and the supply of single-family homes remaining constrained, residential mortgage credit should remain stable in 2025. Although inflation appears to be under control for now, notwithstanding the extent of potential tariff pressure, S&P Global Ratings will continue to monitor key affordability indicators that could hinder borrower cash flow.

Over the near term, the trajectory of the 30-year fixed mortgage rate will frame the general trends in home prices and refinancing. Other factors influencing housing and mortgages--such as home supply--are already factored into housing fundamentals at the national level and will take time to shift. Although mortgage loan performance was generally strong in 2024, delinquencies started to increase for some loan pools in the second half of 2024. In addition, certain regions have had outsized population growth compared to the national average. This has been a key driver of home prices in many states and municipalities, particularly Florida--despite that state's storms and rising home insurance premiums.

We anticipate non-agency issuance of $160 billion in 2025, a 16% increase from 2024 (which we project to finish at roughly $138 billion). With our expectation of steady population growth and declining mortgage rates, there should be minimal headwinds to hinder issuance growth. Indeed, the volumes of both new purchases and refinance activity should benefit from falling rates, as housing demand persists. Certain market-related factors may incentivize financial institutions to hold mortgages on their books, which could affect the securitization rate of mortgage originations this year. However, this should be more than offset by securitization of new mortgage originations of one– to four-unit properties. Fannie Mae has forecast an increase of roughly 19% in originations in 2025, which we consider a bellwether of non-agency issuance.

Chart 1

Chart 1 shows our issuance forecasts broken out by sub-asset class as well as historical issuance for comparison. Again, non-qualified mortgages (QM) are expected to dominate non-agency issuance. As the non-QM market enters the 11th year since the initial QM rule, non-QM originations have become increasingly common. Non-QM issuance--including debt-service coverage ratio (DSCR) loans for investor properties--is projected to make up a little over 30% of non-agency issuance in 2024, and we project it will make up slightly less than 30% in 2025. The slight decrease stems partly from the recent popularity among certain investors (predominately insurance companies) of holding whole loans rather than RMBS. Nonetheless, the origination market should grow in 2025 as the non-QM product becomes even more common. Also spurring non-QM growth is demand by investors, who appreciate that the loans tend to be less rate-sensitive than those of agency RMBS. In addition, the proportion of self-employed borrowers in loan pools is consistent with that of the broader economy as it relates to income types and sources of employment.

We believe jumbo and agency-eligible securitization volumes will generally be consistent with 2024 levels. Although origination volumes will be higher in those subsectors, this could be offset by waning concerns regarding capital treatment (due to the looming implementation of Basel IV) that likely contributed to somewhat outsized securitization volume in 2024. Although we expect the 30-year mortgage rate to fall in 2025, we still anticipate growth in closed-end second (CES) and HELOC securitizations, given the large number of homeowners still sitting on low first-lien mortgage rates. Other cohorts across the non-agency securitization market will see modest increases in 2025.

The 30-year mortgage rate appears poised to finish 2024 stubbornly high given its mid-year decline, in part because the initiation of Fed tightening led to a bump in the 10-year Treasury note yield. Subsequently, mortgage rates increased almost 100 basis points (bps) in October, returning to near 7%. S&P Global Ratings' chief U.S. economist forecasts the 30-year fixed mortgage rate to average 5.9% in 2025, with first-, second-, third-, and fourth-quarter readings of 6.2%, 6.0%, 5.9%, and 5.5%, respectively. While the mortgage rate struggles to come down, so too does its spread to the 10-year Treasury. Although this spread has tightened from 300 bps two years ago, it remains higher (at roughly 250 bps) than the 30-year historical average, which was closer to 180 bps (see chart 2).

Chart 2

Our economist projects the mortgage rate spread to the 10-year Treasury to be 210 bps in first-quarter 2025, falling to 170 bps by the fourth quarter. Despite the tightening, we don't believe the corresponding decline in the mortgage rate will be sufficient to entice a meaningful share of existing homeowners to sell and re-transact, especially not during the popular spring selling season.

Approximately 10% of homeowners with conventional mortgages (most originated in the last two and a half years) will be "in the money" and incentivized to refinance as rates fall in 2025. However, it's unclear how many of these will choose to act immediately as opposed to waiting to see if rates continue falling. Due to widespread and instantly available market information, consumers are likely better equipped to make refinancing decisions today than they were in the past. Moreover, mortgage origination technology has also advanced, which could lead to repeat refinance activity on the part of originators who have spent the past couple of years operating in a high interest rate environment after the pandemic buying and refinancing boom. With more measured home price appreciation (HPA) over the past few years and maximum cash-out loan-to-value (LTV) ratios of 80% for the government sponsored enterprises (GSEs), we expect the cash-out share of refinance activity to be limited and refinancings to predominately comprise mortgagors that consummated their loan in the last few years and are just lowering their rate. Chart 3 shows the share of GSE loans broken out by interest rate. As of second-quarter 2024, GSE loans with rates of 6% or higher was a little more than 10%.

Chart 3

While the momentum of home-price growth has softened since the pandemic, we don't expect negative HPA at the national level in 2025, regional variability notwithstanding. The third quarter Federal Housing Finance Agency (FHFA) index for quarter-over-quarter growth was short of the long-term average. Indeed, it was substantially lower than in 2022 and 2023 and the lowest reading since 2011 (see charts 4 and 5, which show the seasonally unadjusted Quarterly FHFA All-Transactions Index). The December Fannie Mae Housing Forecast for the FHFA index indicates 2025 annual (Q4-Q4) HPI of 3.6% compared to 5.8% for 2024.

Chart 4

Chart 5

Regional variation in home-price changes has been influenced by state-to-state migration patterns and immigration. Although segments of Florida real estate face rising insurance premiums, storm damage, and consequential displacement, the state continues to show strong population growth in specific areas. Of the roughly 400 metropolitan statistical areas (MSAs), five of the top 12 by population growth are in Florida (see chart 6). On the other hand, the bottom 12 MSAs (see chart 7) point to the pattern of movement out of areas in the North and Northeast, such as New York and Pennsylvania. Despite these migration patterns, the Northeast has more recently outperformed certain southern-belt states in terms of home-price growth. It's difficult to predict rates of immigration, especially as the topic becomes politicized. However, immigration is a strong driver of demand and, in turn, home prices. Perhaps a greater factor in Florida is the threat of climate-related events and the related rising insurance premiums, which will continue to be a topic of interest.

Chart 6

Chart 7

There were some delinquency upticks in 2024, mainly in the non-QM market, with the relative underperformance being more pronounced for the 2023 and 2024 vintages. While there wasn't a substantial deterioration in performance, there was a noticeable trend as the month-over-month prints increased rather consistently. The November remittance 30+ days and 60+ days non-QM delinquencies (including loans in foreclosure and REO) were 5.8% and 3.5%, respectively. For comparison, the November 2023 remittance for non-QM had 30+ days and 60+ day delinquencies at 4.5% and 2.5%, respectively. We stratified our portfolio of rated non-QM securitizations to observe the extent to which performance depends on loan attributes. The table shows that drivers of delinquency included FICO, LTV ratio, loan purpose, and amortization type. Note that alternative income documentation also has an oversized presence in the delinquent population.

We also carried out a logistic regression, which corroborated the table's findings. Interestingly, while the regression did suggest that ARM loans are more likely to be delinquent, the result wasn't significant. In any case, the greater share of delinquent ARM loans stratified in the table is likely related to those out of their hybrid period and subject to interest rate and payment increases. This wasn't evident before rates rose in 2022, given the low rate regime and most ARM loans still within their initial fixed-rate period. Cash-out loans could be driving adverse behavior for newer-vintage loans because borrowers might be taking a rate increase to access home equity. Interestingly, non-owner-occupied property loans showed a better payment profile than the owner-occupied loans.

Entering 2025, the main themes will be the trajectory of the 30-year fixed mortgage rate, the extent of inflationary pressure on mortgagor obligations (whether in the form of insurance or consumer goods), and home price appreciation or depreciation in certain areas (whether due to rising inventories, changes in population patterns, or both). Privatization of the GSEs is once again a topic as the new administration takes office. Although we don't have a formal view on the likelihood of privatization, we note that GSE reform has been off and on the table since 2013.

Inflation will continue to be a subject of interest. In addition to its direct impact on mortgagors' ability to make monthly mortgage payments, inflation uncertainty arising from the potential for tariffs in 2025 will be a key theme. This is because it directly affects the price of building materials and labor, which are essential goods and services for re-building properties subject to damage, and form the overall cost basis of new home construction. Insurance premiums continue to be a noteworthy topic in connection with the potential impact on home prices (see "The Impact of Rising Insurance Premiums On U.S. Housing," April 22, 2024). Chart 8 depicts the average premium by state for $300,000 of dwelling coverage. Median home price is plotted for each state to put the coverage amount into context. The chart indicates that Florida and Nebraska are close at the top because of their exposures to the risk of extreme weather. As most market experts anticipate continued climate volatility, we will continue to observe the homeowner's insurance market in 2025 and its corresponding impact on housing and the mortgage market in general.

Chart 8