Rising Mortgage Delinquencies and Foreclosures: A New Era of Risk in U.S. Real Estate?

The U.S. housing market is at a crossroads. By Q1 2025, the seasonally adjusted mortgage delinquency rate had climbed to 4.04%, a 10-basis-point increase from the previous year. While this number may seem modest, it masks a deeper story: rising delinquencies and foreclosures are no longer isolated incidents but systemic risks that threaten to reshape the real estate landscape. For investors, this means reevaluating exposure to mortgage-backed securities (MBS), real estate investment trusts (REITs), and regional banks—sectors historically insulated from downturns but now facing unprecedented pressure.

The Delinquency Surge: A Harbinger of Systemic Stress

The first quarter of 2025 revealed troubling trends. Conventional loan delinquencies rose 8 basis points to 2.70%, while VA loans in foreclosure hit 0.84%, the highest since 2019. The expiration of the VA's foreclosure moratorium without a replacement program has left borrowers in a precarious position, and the fallout is already visible. For example, Lakeland, Florida, and Columbia, South Carolina, now rank among the top metro areas for foreclosure rates, with 0.29% and 0.28% of housing units affected, respectively.

These trends are not confined to distressed markets. Even prime borrowers are showing signs of strain, with 30-day delinquencies rising 11 basis points to 2.14%. The underlying causes—interest rate fatigue, depleted pandemic savings, and stagnant wages—suggest this is not a temporary blip but a structural shift.

Mortgage-Backed Securities: A Volatile Foundation

MBS, once the bedrock of institutional real estate investing, now face a dual threat: rising defaults and a prolonged high-rate environment. The average time to complete a foreclosure in Q2 2025 was 645 days, down from 777 days in 2024, but still far too long to prevent cascading losses. For MBS holders, this means extended periods of uncertainty and valuation volatility.

Consider the case of AGNC Investment Corp. (AGNC) and Annaly Capital Management (NLY), two of the largest mortgage REITs. Both rely on the stability of MBS yields, but as delinquencies climb, their portfolios are exposed to higher prepayment risks and credit losses. The recent spike in VA foreclosures, in particular, could force these REITs to mark down assets aggressively, eroding capital.

Regional Banks: The Hidden Vulnerability

Regional banks, often overlooked in favor of megabanks, are uniquely vulnerable. Many hold large concentrations of residential mortgages in second-tier markets where home price appreciation has stalled. Zions Bancorp (ZION) and New York Community Bancorp (NYCB) are prime examples: their loan books are skewed toward suburban and rural areas where economic diversification is limited.

The data tells a troubling story. In Q1 2025, JPMorgan Chase (JPM) increased its credit loss provisions by 75% from the previous quarter, reflecting a 50% probability of recession. Smaller banks, with less capital and narrower margins, are likely to follow. For instance, First Busey Corp. (BUSE) reported a $45.6 million provision in Q1, a 31.3 million-dollar overestimate of expectations, signaling deteriorating asset quality.

REITs: The Overlooked Pressure Points

Mortgage REITs are not the only real estate players at risk. Equity REITs, particularly those focused on commercial real estate (CRE), are also under pressure. The interconnectedness of consumer credit and CRE is evident: as homeowners default on mortgages, they're more likely to default on credit cards, auto loans, and other debt. This creates a feedback loop that could depress demand for retail and office spaces, sectors already struggling with remote work and e-commerce.

Consider the case of Simon Property Group (SPG), a mall REIT. If credit card delinquencies (which hit a 13-year high in 2025) continue to rise, tenants in discretionary retail could face closures, reducing foot traffic and rents. Similarly, office REITs like Boston Properties (BXP) could suffer as corporate budgets tighten.

Investment Implications: Navigating the New Normal

For investors, the message is clear: the era of complacency in real estate is over. Here's how to position a portfolio:

1. Reduce Exposure to High-Risk MBS and REITs: Avoid REITs like AGNC and NLY unless they can demonstrate robust credit risk management. Similarly, steer clear of regional banks with heavy concentrations in VA or FHA loans.
2. Diversify into Resilient Sectors: Prioritize REITs with exposure to industrial or healthcare real estate, which are less sensitive to consumer defaults. Prologis (PLD) and Ventas (VTR) are strong candidates.
3. Monitor Credit Metrics Closely: Keep an eye on regional bank earnings and credit loss provisions. Banks like U.S. Bancorp (USB) and PNC (PNC) have shown better risk management, but even they are not immune.
4. Hedge Against Systemic Risks: Consider short-term Treasury bonds or high-quality corporate bonds to offset real estate volatility.

Conclusion: A Cautionary Tale

The U.S. housing market is not in crisis yet, but it is teetering on the edge. Rising delinquencies and foreclosures are not just symptoms—they are warning signals of a broader economic recalibration. For investors, the key is to act before the next wave of defaults hits. The real estate market has always been cyclical, but the current mix of high rates, weak wage growth, and policy gaps creates a uniquely volatile environment. In this climate, caution is not just prudent—it's essential.