Private First-Lien Residential Real Estate Credit: A Risk-Adjusted Return Thesis in Today’s U.S. Market

By John C. Day, Partner, Oakhurst Advisors, LLC 

Private first-lien loans secured by U.S. one-to-four-unit residential properties can offer attractive risk-adjusted returns today. Senior collateral, conservative leverage, and contractual income can help investors navigate lingering inflation and an uncertain rate path while avoiding much of the duration risk embedded in longer-maturity public bonds. In addition, returns can be driven by underwriting and structure (attachment point, covenants, and controls) rather than by taking more duration or equity beta. 

1. The macro setup favors short-duration, spread-oriented credit. On December 10, 2025, the Federal Open Market Committee lowered the federal funds target range to 3.50% – 3.75% and emphasized that future moves will depend on incoming data and the evolving outlook.¹ The same meeting materials show only gradual easing in the median path (3.4% for 2026 and 3.1% for 2027).² Inflation remains relevant: CPI-U was up 3.0% over the twelve months ending September 2025.³ With that backdrop, investors face a tradeoff between yield and interest-rate sensitivity. For context, the 10-year Treasury yield was about 4.13% on December 10, 2025, and broad investment-grade corporate yields were about 4.82% that same day.^4/5 

2. First-lien priority is a structural form of downside protection. Lien position determines the order of payment in foreclosure or bankruptcy: a first-lien mortgage has priority over junior liens, and foreclosure-sale proceeds are divided according to lien position.⁶ When a loan is originated at conservative loan-to-value and documented correctly, that seniority can reduce loss severity in stress cases and shift outcomes away from reliance on optimistic property appreciation. 

3. Residential collateral is supported by supply constraints and still-positive price trends. The Federal Housing Finance Agency reported that house prices rose 2.3% from July 2024 to July 2025.⁷ Freddie Mac estimates the U.S. housing market was undersupplied by roughly 3.7 million units as of 3Q24.⁸ Undersupply does not eliminate drawdowns, but it can support recovery values and market liquidity—important for first-lien strategies that rely on orderly refinance, sale, or workout exits. 

4. Many private first-lien loans reduce duration by using shorter maturities and floating-rate coupons, often set as SOFR plus a spread. The New York Fed describes SOFR as a broad measure of overnight borrowing costs collateralized by Treasury securities.⁹ Floating-rate coupons can help preserve income as rates move, while shorter maturities emphasize realized carry and principal return rather than secondary-market pricing. 

5. Aggregate data does not indicate broad residential distress. The Mortgage Bankers Association reported a seasonally adjusted delinquency rate of 3.99% for one-to-four-unit residential mortgages at the end of Q3 2025.¹⁰ Bank-reported delinquency rates on single-family residential mortgages booked at all commercial banks were 1.78% in Q3 2025.¹¹ These measures differ, but both suggest that residential credit performance is not currently crisis-like; manager discipline and local-market underwriting still matter. 

6. The risk-adjusted “edge” is often an illiquidity and complexity premium paired with senior collateral. Private lending requires origination, valuation, title/insurance controls, and servicing/workout capabilities. Investors are typically compensated for that complexity and reduced liquidity with incremental spread; when leverage is kept low and execution is strong, returns can be driven primarily by coupon and principal repayment with collateral-backed downside protection. In practice, managers can further dampen tail risk by focusing on low attachment points, requiring borrower cash equity, escrowing taxes and insurance where appropriate, and maintaining a fast, disciplined workout playbook. 

7. Why this matters for future low-levered fixed income. If policy rates drift lower over time, yields available in cash and short-term Treasuries will likely compress. A disciplined first-lien private-credit allocation can help address reinvestment risk by earning spread from underwriting and structure rather than from duration. The key is to keep leverage conservative and focus on borrowers with realistic, verifiable exit plans. 

Bottom line: in an environment of persistent inflation and rate uncertainty, well-structured private first-lien residential credit can offer a compelling blend of income, seniority, and shorter-duration risk. The thesis is highly sensitive to underwriting—especially valuation, loan-to-value limits, documentation, and servicing quality—but those are controllable inputs for experienced managers, and they can provide useful diversification from public markets. 

Footnotes 

1. Board of Governors of the Federal Reserve System, “Federal Reserve issues FOMC statement” (Dec. 10, 2025), https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm (accessed 2025-12-11). 

2. Board of Governors of the Federal Reserve System, “Summary of Economic Projections, December 10, 2025” (Table 1: median federal funds rate projections), https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20251210.pdf (accessed 2025-12-11). 

3. U.S. Bureau of Labor Statistics, “Consumer Price Index – September 2025” (CPI-U 12-month change), https://www.bls.gov/news.release/pdf/cpi.pdf (accessed 2025-12-11). 

4. Board of Governors of the Federal Reserve System (US), “Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis (DGS10)” (observation for 2025-12-10), retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DGS10 (accessed 2025-12-11). 

5. Ice Data Indices, LLC, “ICE BofA US Corporate Index Effective Yield (BAMLC0A0CMEY)” (observation for 2025-12-10), retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/BAMLC0A0CMEY (accessed 2025-12-11). 

6. Consumer Financial Protection Bureau, “Mortgage Examination Procedures: Origination” (Jan. 10, 2014), p. 2 (lien position and priority; foreclosure proceeds distributed by lien position), https://files.consumerfinance.gov/f/201401_cfpb_mortgage-origination-exam-procedures.pdf (accessed 2025-12-11). 

7. Federal Housing Finance Agency, “U.S. House Price Index – September 2025” (published Sept. 30, 2025), https://www.fhfa.gov/reports/house-price-index/2025/9 (accessed 2025-12-11). 

8. Freddie Mac, “Housing Supply: Still Undersupplied by Millions of Units” (Nov. 26, 2024) (estimate of 3.7 million unit housing shortage as of 3Q24), https://www.freddiemac.com/research/insight/housing-supply-still-undersupplied (accessed 2025-12-11). 

9. Federal Reserve Bank of New York, “Secured Overnight Financing Rate (SOFR) Data” (definition and methodology), https://www.newyorkfed.org/markets/reference-rates/sofr (accessed 2025-12-11). 

10. Mortgage Bankers Association, “Mortgage Delinquencies Increase in the Third Quarter of 2025” (Nov. 14, 2025), https://www.mba.org/news-and-research/newsroom/news/2025/11/14/mortgage-delinquencies-increase-in-the-third-quarter-of-2025 (accessed 2025-12-11). 

11. Board of Governors of the Federal Reserve System (US), “Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks (DRSFRMACBS)” (Q3 2025 observation), retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DRSFRMACBS (accessed 2025-12-11).