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Investing: Debt Performance Is Deteriorating Fast

The latest round of bank data shows that loan debt performance is worsening. While markets remain far healthier than anticipated, this is certainly a moment for opportunistic investors to find attractive deals, and value add investors to find better pricing and more upside than they have seen in years.

Mortgage Loan Performance Reverses Trend

Q4 2022 data from banks being reported by DistressedPro reveals that the sectors which appeared to be improving earlier in the year have now reversed course. The final three months of last year saw mortgage loan defaults and more borrowers falling behind. 

This appears to apply to all categories of real estate based loans, with the exception of agricultural and farmland loans. 

On the residential front, banks reported holding around $40B in nonperforming loans as we moved into 2023. $16B more home loans fell 30-89 days late in the last three months of the year.

On the commercial side, the volume of non-owner occupied CRE loans that fell 30-89 days late almost doubled over the previous quarter. 

With many more likely to find financing too expensive, or elusive on the maturity of their existing loans, far more could fall into default over the next two quarters.

Business & Consumer Debt Performance Hitting New Two-Year Lows

While we still haven’t really seen the impact of this water falling over into mortgages yet, business and consumer debt performance has just kept worsening, now hitting a new two year high in terms of failure. 

This includes $9B in 30-89 day late C&I loans. As well as $12B in auto loans at the same stage of default, and $2B more in credit card debt. 

Even if there is an economic rebound in the second half of 2023, just coming out of the holidays means there is little expectation of these numbers turning around in the next two quarters. At least barring tax refund season, which may help some consumers get back on track with their debt obligations. 

Opportunistic & Value Add Investing 

All of the above presents great opportunities for real estate investors. 

While distress and defaults are rising, we have not yet seen a tsunami of REOs that threaten the DNA of the system or market. 

So, this is the perfect time for opportunistic investments and takeovers of failed or stalled construction projects, condo buildings, and new home communities. 

On the value add side, investors that can inject new capital into proven buildings can add a lot of value, and even just with new and better management may be able to generate superior yields. 

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