The COVID-19 pandemic caused significant disruptions to the global economy, and the real estate market has not been immune. The pandemic presented challenges and opportunities for real estate investors. One of the key indicators of the pandemic’s economic strain on the real estate market is the increasing mortgage delinquencies across the country. 

Mortgage delinquencies can have significant implications for different real estate investors: lenders, servicers, bondholders, and property owners.

According to the Mortgage Bankers Association’s (MBA) National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to 3.96% of all loans outstanding at the end of 2022. While this number isn’t the worst rate in history, it does require investors to plan appropriately. 

Based on this survey, Louisiana, Florida, Indiana, West Virginia, and Mississippi are the top five states for the most significant increase in overall delinquency rates. 

Read on to explore how real estate investors can navigate the challenges posed by mortgage delinquencies and take advantage of the opportunities presented by the post-COVID real estate market.

The Impact of Mortgage Delinquencies on Real Estate Investors

Mortgage delinquencies can have significant implications for different real estate investors: lenders, servicers, bondholders, and property owners. Lenders and servicers may face increased losses and operational costs associated with collecting funds, loan modifications, or foreclosures. Bondholders may experience reduced cash flows, lower bond prices, and higher default rates. Real estate owners may face lower demand for rental properties, higher vacancy rates, lower rental income, and potential declines in property values. None of these outcomes sound favorable. 

Real estate investors who engage with mortgage-backed securities (MBS), real estate investment trusts (REITs), or loan portfolios may be affected by the increased delinquency rate. For example, MBS investors may face lower yields and higher risks due to the rising default and prepayment rates. Similarly, REITs with mortgage-related assets may experience reduced dividends and net asset values due to the lower cash flows and higher volatility of these assets.

Factors that Influence Mortgage Delinquency Rates

Mortgage delinquencies are influenced by various economic and demographic factors, like employment conditions, inflation, interest rates, housing prices, loan terms, and forbearance programs. For the past 15 years, mortgage delinquencies have closely tracked employment conditions. Despite recent positive numbers of job growth, MBA still forecasts slower hiring and rising unemployment, with the rate rising to 5.2 percent by the end of the year. This could easily lead to further increases in mortgage delinquencies.

The rise in inflation is also contributing to the increase in delinquencies, as borrowers’ purchasing power and ability to make mortgage payments are hurt by rising prices. At the same time, the end of forbearance programs can lead to higher delinquency rates as borrowers who were granted relief from their payments during the pandemic will struggle to resume their regular payments.

Investors who focus on affordable housing can benefit from the high demand for housing along with stable cash flows, tax incentives, and government subsidies.

Navigating the Challenges of Mortgage Delinquencies

Real estate investors with mortgage-related assets should watch the delinquency rates and assess their holdings’ credit quality and risk characteristics. They may consider investing in different loan types to help diversify their portfolios. Real estate investors may also seek to take advantage of the opportunities presented by the current market conditions, such as investing in worn properties. 

Investors should stay current with the latest trends and developments in the housing market and the economy. One of the recent trends is the rise of online real estate platforms. Sites like Redfin and Zillow have transformed how people buy and sell properties. These platforms offer investors access to a wide range of properties and financing options and data that can help them make informed decisions.

Another significant trend is the growing demand for affordable housing. According to a report by the National Low Income Housing Coalition (NLIHC), there is a shortage of 7.2 million affordable and available rental homes for extremely low-income renters in the United States. Many renters must spend more than half of their income on housing costs.

Investors who focus on affordable housing can benefit from the high demand for housing along with stable cash flows, tax incentives, and government subsidies. You also gain the moral victory of contributing to the well-being of those who need safe and affordable housing.

Mitigating Risks and Seizing Opportunities in the Mortgage Market

To reduce the risks of mortgage delinquencies and capitalize on the opportunities in the mortgage market, investors should consider the following strategies:

Real estate investors should explore options, like diversifying their portfolios, hedging their risks, and actively managing their assets, to reduce their exposure to market risks while preparing for future opportunities.

Diversification: Real estate investors can reduce risks by diversifying their portfolios across different loan types, maturities, and credit ratings. For example, they may invest in both prime and subprime loans, fixed-rate and adjustable-rate loans, short-term and long-term loans, and high-yield and investment-grade loans. By diversifying their portfolios, investors can spread their risks and get a better investment return. 

Hedging: Investors can hedge their risks using options, futures, or swaps. For example, they may buy put options on investments to protect themselves from drops in bond prices. They can also purchase credit default swaps on loan portfolios to protect themselves from defaults or credit events. By hedging their risks, investors can reduce their exposure to risky market conditions and limit their losses.

Active management: Investors can actively manage their mortgage-related assets by monitoring their performance, analyzing their credit quality, and adjusting their positions accordingly. For example, they may sell underperforming assets or buy undervalued assets to help borrowers stay up-to-date on their payments. Investors can enhance their returns and reduce their risks by actively managing their assets.

Proper Planning Makes the Difference

Mortgage delinquencies impact the housing market and the larger economy. The recent increase in delinquencies comes from current economic conditions, inflation, and forbearance programs. While it’s unclear how mortgage delinquencies will play out for the rest of the year, investors can take steps to mitigate risks and capitalize on opportunities in the mortgage market. Real estate investors can navigate the challenging environment and achieve their investment goals by staying informed and proactive.

Real estate investors should explore options, like diversifying their portfolios, hedging their risks, and actively managing their assets, to reduce their exposure to market risks while preparing for future opportunities. They need to stay up-to-date with the latest trends and developments in the housing market to make informed investment decisions, and with the right strategies and tools, real estate investors can succeed in this challenging time.