REOs & Non-Performing Mortgages Jump by Over $10B

Jan 7, 2021

The data coming directly from banks shows that defaulting mortgages and REOs rose by more than $10B in the third quarter of 2020, with even more distress expected to show up from the fourth quarter. 

The Data

While the mainstream media has painted a very positive picture of the strength of the US housing market through 2020, the data coming from behind the scenes shows there is still a substantial amount of distress among mortgages. The latest figures reported by show $12.3B more bank REOs and non-performing residential mortgage loans at the end of Q3, for a total of $85.8B. 

REOs made up just $1.4B of this, with the rest being non-performing mortgages ranging from 30 days late to the non-accrual stage. There were also $6B of non-accruing HELOCs at the beginning of Q4 2020. 

Banks have to Deal with it

Banks and lenders are not just sitting on these non-performing assets. They can’t afford to. And especially not with the likelihood of a lot more coming. They have already been trading tens of billions of dollars of distressed loan notes after the past year, and are likely to do the same throughout 2021. 

Restrictions on some types of foreclosures may delay properties from becoming REOs for the next few months, or a year by the time they make it through the foreclosure process, while stimulus checks may help some borrowers catch up. However, the tens of billions of defaulted loans over 60 days late are unlikely to be cured. 

Banks will shift these off their balance sheets to improve their own performance, and free up assets and capital to be able to generate revenues on originating new loans. 

The Opportunities for Investors

There is a tremendous opportunity for real estate and debt investors to step up and help borrowers and homeowners, and the market as a whole. 

These notes can either be bought at discounts as property values continue to rise and the properties themselves be resold at great profits. Or loans will be caught up, with or without workout offers from note holders, which can provide long term cash and great yields. 

Looking Forward

Expect more of the same through 2021. More defaulting mortgages, but also high resale demand and higher house prices. These are perfect conditions for investors. 

Either investors can buy individual notes and properties. Or they can invest through funds, which have access to larger bulk deals at even deeper discounts.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

Image by Gerd Altmann from Pixabay