According to the latest data, mortgage debt is performing far better than expected. 

While everything appears to signal a healthy and strong market on the surface, what other data should investors be watching? What is likely to happen next? How do you invest now?

Mortgage Loan Performance

According to the latest round of data, banks reported through DistressedPro that every category of mortgage debt is seeing fewer lates and defaults. 

This includes residential mortgage loans, multifamily, and commercial real estate debt. 

This may seem surprising given all of the negativity in the news lately. Yet, loan performance seems to have continuously improved over the past two years, and is trending in a healthy direction. 

Of course, as always there are some new defaults happening, though a tiny fraction of those seem to be going the full distance to becoming REOs. 

Other Debt Performance

While the above is encouraging, and suggests that the US real estate market might be even stronger than many realized, investors should also be paying attention to other data sets that may act as leading indicators of future performance.

In the third quarter of 2022, banks again reported that credit card debt, auto loans, and business loans all continued to see performance deteriorate. The numbers hit new two year highs for late and defaulting borrowers in terms of dollar volume. 

This suggests another type of debt bubble could be building up. 

What’s Next?

The truth is that there are many factors at play. There are many wildcards that could be played. 

Non-performing debt of other types could waterfall over into mortgage debt at any moment. Borrowers typically first quit paying credit cards, then business loans, and then let their cars get repossessed, before failing to pay mortgages. 

However, those that have locked in low rates may be able to hold on far better than from 2006 to 2009. 

It could really go either way. There could be more stimulus. We could see a big bank failure. Many are also split on whether we just exited a recession or if we are heading into a new depression.

For Investors

The real estate market is stronger than many thought. Yet, there is certainly distress behind the scenes. This is making good deals possible.

Those that don’t want the hassles of investing in mortgage debt may choose to invest in income producing assets, such as multifamily. This doesn’t rely on short term paper valuation fluctuations for performance. Even better if investors can participate in value add deals, with strong equity positions.

Investment Opportunities

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

Photo by Extraction on Unsplash

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