The Delinquency Rate Is Lying to You

Up until September 30th of 2025, you could still call your bank or your servicer, say you had COVID, and they had to give you a modification or a deferral. This whole concept of what the feds have allowed banks to do as part of their efforts to extend and pretend. Bankers have the flexibility, I'm not saying all bankers do this, but banks have the flexibility to rewrite the terms of that loan. The 0.54% is the GSE's serious delinquency rate, according to this year's recent numbers, but less than 1%. It's the cleanest number in the mortgage market, but it's also the most misleading. If you count every borrower who touched forbearance, got a deferral, took a partial claim, a modification, exited without a plan, the shadow non-performance rate is closer to 5% to 6%. That's a 10X gap between the GSE's less than 1% serious delinquency rate. And what really happened in the last 5-6 years since COVID. Welcome to the Det. Doctor podcast, where we deliver the definitive prescription for navigating distressed real-estate debt. I'm your host and America's most qualified debt doctor, Bill Byel. I spent my career investing in diagnosing and reviving thousands of distressed real-estate situations. The debt doctor prescribes proprietary remedies to help you identify, acquire, and monetize undervalued real estate assets. Each episode gives you insider access to the strategy's top cohorts use to transform market volatility into double-digit returns. If you enjoy what you hear today, hit the follow button, subscribe so you don't miss an episode, and please share your support with a quick review. You can find me on the web at billbyemail.com. Thanks for joining this episode of The Det Doctor. Good morning, good afternoon, or good evening. Wherever in the world you're joining The Det Doctor. Thank you for being with me here today. Today's solo episode. We're continuing the trend as I near the release of my upcoming book, The Storm. We're continuing the trend of discussing pieces and parts of the book or some topic that might relate to it. If this is your first time or not, if you are not subscribed to the channel, it would mean a lot if you click subscribe and like. We'd love to hear from you in the comments. You can also email me anytime. Today, I want to talk about the shadow inventory of distress that exists out there. It really harks back to a buildup that started way back in the GFC. There were loans that were getting modified for years. In my most recent blog that I just posted this week, I speak about the fact that the phrase of the last decade really is extend and pretend. You understand it when you have an asset back to loan, like a piece of real estate as a lender and the price of that real estate is going up. You probably, I could see the general thought behind extended pretend, especially if you're a bank that gave a loan out that maybe doesn't look so good. But really, what we're going to talk about is maybe the fact today that things aren't as pretty as they seem. The numbers, the "factual data" that is out there is actually hiding certain things. It doesn't even the performance of a loan itself doesn't necessarily reflect how an asset got there or what the chances are of it continue to success. There's a lot of loans out there that are technically performing, their current, under whatever plan they're under, they're paying. Those who check in the boxes for performing status, but that doesn't mean they're healthy. It doesn't mean that they're low risk. If you're looking at a portfolio of performing loans in the secondary market or analyzing it for any reason, maybe you're thinking about investing in a mortgage bond or other type of security, this is also meant for you thinking on a macro level. It plays into, again, the thesis that I have, which is that there are multiple elements that are coming together, climate, insurance, cost of construction and the cost of capital increasing and coming together in what could be a perfect storm in financial markets. Let me go through and spend a little time talking to you today about this thought of what do you think and build? You're. you've got. You say that performing loans are not performing, what does that mean? We're going to talk about three areas that I can give as examples, both commercial real estate and on the residential side. Those are going to be the areas that will go through each of those. Right now, I look crazy, right? Because the 0.54% is the GSE's serious delinquency rate according to this year's recent numbers. The less than 1%, it's the cleanest number in the mortgage market, but it's also the most misleading. If you count every borrower who touched forbearance, got a deferral, took a partial claim, a modification, exited without a plan, the shadow non-performance rate is closer to 5 to 6%. I'm going to break it down, don't worry, I'm not just making stuff up, but when you think about it, that's a 10X gap between the GSE's less than 1% serious delinquency rate and what really happened in the last 5, 6 years since COVID. See, in 2019, before COVID, Fannie and Freddie did about 76,000 permanent loan modifications in that one year. But they have now, since the pandemic, layered on 7X that, another 433 permanent mod, so almost half a million permanent mods, plus millions of other payment deferrals, and talking about where they'll just kick a payment back to the end in a second position or something like that. But that's not performance, that's just ledger entry. Then we're going to talk on the CR-E side about TDR and Cecil. TDR is a classification of the federal government uses, and they give it, they require banks to report what are called their trouble debt relief loans. It's a TDR classification. But what's interesting about that is that the rules for how to modify someone inside of a bank, those TDR rules, there are loans that are modified and they are performing, and we're going to get into it. But they're not performing at the same terms. And I'll come back to that in a second. Services now have provided 8.6 million for bank since March of 2020, the start of COVID. That's one out of every six American mortgages has touched a four-barrens or a hat of four-barrens. That's roughly a third of the loans of that, oh, and then this is another interesting example we'll get into, this is where we're gonna start to build this concept of a shadow inventory of distress that may come to life. And that's roughly a third of the loans came out of those four-barrens, but they are not current today, five years later. So extensions, modifications, that alone just didn't perform. The multiple loans had multiple modifications layered over time. Let's talk about the third area that I'm just gonna touch on right now and I'll come back is private lending. Such private lending has, and the new style of securitization, CLOs and new RTL securitizations, but especially in the private lending sector has taken such a larger chunk of the total lending. That's both on the residential investment side and on the residential, even on on a rockupide, the SCR loans, but certainly on the commercial loan side, there's been such an explosion of private credit, private equity that has come in to do private lending. And there's no stats on it as an industry. Most private investors do not allow their servicers to report their default rates. There's no opacity there. So, what causes this situation? And a couple of general points we've talked about this, insurance costs are up all around the country, if you wanna come, whether it's commercial property or residential property or the commercial property, you can't even get insurance sometimes. On residential, we're seeing people on fixed income have their insurance go from $1,000 to $4,000 or $5,000 per year in places like Florida and Texas and California. And even the middle of the country where there's now a much larger tornado region and there's freezing storms and all of us are feeling it. So, on a commercial real estate point of view, there is the increased cost or the commercial real estate also referred to residential investment real estate. That additional cost to carry a property, if you can't charge an additional rent, that means your net income is lower, which means the value of the property is lower. That's just basic math in real estate. And the other big turn of course, you had COVID, shut things down. That's where the residential market went through 8.6 million for barrens over the course of less than five years. And then on the CRE beside we'll come back to the TDR. But what really happened to all industries, especially affecting commercial real estate and we haven't seen this wall hit yet, is the shift in interest rate, the shift in the cost of capital. And now you've got all types of sponsors all over the country in all asset classes that are dependent on conditions improving. So, I'm gonna go into some numbers just to back up what I'm saying here. Do you remember the three areas we're talking about is on the residential side, there's a missing number, there's a lack of the true number being published on the commercial side same thing. We're gonna find those in those number one and two. And then number three, this private lending, which there's no statistics on. And I know for a fact is from being in the industry and knowing people in the industry that the default rates inside of certain private lending institutions both commercial and residential are way higher than the public would want to know. So, I'm gonna do some framework back to the envelope numbers for you. And total, as I mentioned, there's a total of about 50 million first lean mortgages on residential properties in the US. Barbers who entered COVID forbearance at some point in the last five years. That's right, up until September 30th of 2025, you could still call your bank or your servicer, say you had COVID and they had to give you a modification or a deferral. Anyways, there are about 8.6 to 9 million folks that entered some sort of forbearance. That's about 17 to 18% of the entire market of mortgages. That somehow touched forbearance. Okay, not the less than 1% that we hear. Which by the way, this is all proof that these programs work to help people at least for the time being. There were borrowers who exited these into a formal workout, only about about five to six million of them. That means only about 68% of those that had a forbearance exited it with a settlement, you know. Then that means that there's about 2 million that still are in some sort of workout sub performing status. And then, you know, there's another 1.5 million that exited without a plan. That puts your shadow inventory of single family owner occupied non performers that is not really captured by the GSE rate at about 2.5 to 3 million people. That's about 5 to 6% of the market sitting in some non foreclosure limba. And that is comparative to, that's the not including what the industry's nationwide 1.57 or just around 2% serious delinquency rate is. So that means that just in the number alone of these, of the of loans that we know entered into some kind of help from serviceers because of the COVID rules allowing them to be done. We know for a fact that 2 to 3 million of those never really, they may have paid for a period of time, but they still have passed due balances. So at any time the lender technically could foreclose or they may still be struggling paycheck to pay checks constantly more than 30 to 90 days late. So that's a that's a pretty big number just in that in that alone. And a lot of those people might have still had issues from back in 2008. I want to take a minute to step back to the portfolio managers out there, people or the people that are trying to report on this on a national level. You know, just give you this the understanding that the reporting reflects the status, not the journey, aggregation, you know, when you start to do securitizations and it hides the nuance that we're seeing here, right? And you know, obviously there's, you know, like I said, that there is a real lack of opacity and understanding of where the delinquency rates sit inside of private equity and private credit, even on real estate, especially on real estate. I have friends at major lenders that are saying things like multifamily rates in $50 million loans, $20 million loans and default rates greater than 20%. So the whole COVID thing, the CARES Act Forest Service to do this, by the way, for five years. So you know that. So that's what artificially kept our delinquency rates low on the residential side. So we know that there's about five to six percent that we're given that are that came out of workouts and are still not working. Still, it's still not completely performing or implied. Didn't get a full modification. So that still has to be done. This is the interesting thing about this TDR and I'm going to go back to this. TDR sees the accounting relief. Section 4013 of the CARES Act, again, this is the CARES Act provided banks the option to temporarily suspend certain requirements under US gap related to TDRs. It applied to loans modified between in 2022, but then in 2022, they eliminated the recognition and measurements guidance trouble debt restructuring to entirely replacing it with disclosure requirements for modifications to borrowers experiencing financial difficulty. So in other words, it's a bank can basically modify under any terms and classify the loan as current. And the only evidence is a disclosure in front note that they have to make in the call records that probably nobody reads. So let me come back to that. This whole concept of what the feds have allowed banks to do as part of their efforts to its standard pretend. If you own a $20 million property, if you're a commercial department owner, and I own a $20 million property with a $15 million loan on it. And my tenancy drops, my costs go up, whatever the rate of my mortgage I got five years ago goes up. Whatever it is, I start to falter. I can call the bank and the bankers have the flexibility. I'm not saying all bankers do this, but banks have the flexibility to rewrite the terms of that loan. Now the bankers sitting there saying, well, $20 million loan, I don't want to own this property. I don't want to take this property. I don't want to be a sponsor in most commercial properties are the best equipped to manage those properties, which is the reason why it's in the best interest of lenders and borrowers to work together to talk together to work things out. I mean, going back to the case of the sponsor who had some troubles on a $20 million what he thought was a $20 million piece of property, it has a $15 million loan on it, which by commercial sense is pretty highly levered. If that's the right value for the property, that's 75% loan to value, that's pretty high on commercial properties. That's a reality that we're seeing every day out there. Imagine now the banker can say, listen, he says, well, what can you pay? You don't know what the payment might have been on that $15 million mortgage. Let's say it's $200,000 a month. The banker can say, listen, Bill, I'm going to rewrite the loan. We're going to defer the half of the interest in the payment. You're going to get pay me $100,000 a month. And then we're going to put a deferral of interest on the back end of the loan. As long as you make a payment at $100,000 a month, we can write it as correct. The banks can really, a banker can play games with that because their cost of capital is still pretty cheap. In theory, that should mark to market down that loan and hopefully most banks are doing that at least internally. But anyways, there's a lot of flexibility in the numbers. That's the bottom point. Just coming back to the private lending thing one more time, with the banks getting out of residential lending after 2008, it really opened up an opportunity for private institutions, private equity, family offices to invest in and start with private lending in the residential markets. These are DSCR loans. These are people that are maybe getting their loans based on tenant rent, which obviously subjects it to a lot of fraud and whatnot. And the general sense, if you would think about it logically, is that private lending is riskier lending. And I know for a fact, from my experiences of dealing with originators in the private lending space for the last 10 years, that their default rates are usually in the double digits. What they're good at is managing early defaults and selling those loans out because there's been a market for it. Makes me crazy to say that there was actually a time a few years ago where a defaulted fixed and flipped bridge loan sold more for more than a performing one. Yeah, go figure. But that's today's market. We've talked about where the risk sits right now. And these are the loans that need continued support. These are fixed in the DSCR in the private, in the DSCR and RTL bridge spaces. These are individuals, moms and pops that are fixed and flipped or become landlords. And they are very subject to market conditions. They're subject to a lot of them not being very sophisticated. Not being as professional as maybe they would like to have thought they were. And they need continued support. On the other side of the residential market, and by the way, those loans are all to LLC borrowers. So they're not very difficult to foreclose, which is why private lending likes them as well. On the GSE side, we pointed to the government loans, the conventional loans, PANI, FHA, in the FANI and FREDI side of conventional, we talked about the possibility of up to 5% of a shadow inventory of loans that haven't fully worked out post their COVID for their own finances. On the FHA side of the number, the facts are that it's already double digit default rates in FHA loans. So FHA loans, especially that since 2020 have very high default rates. And most of those loans, even the non-defalted ones, are underwater because they were so highly levered and the cost of things have gone up right at the time when we have hit the top of the market about a year or two ago and are on a way down. So real real issues in FHA to keep an eye on. And then on the commercial side, the commercial side, there's already a ton of dead men walking in commercial real estate, especially in multifamily, especially in the newer construction and multifamily. And even in any asset class, the old re-fi assumptions just don't hold. Money is more expensive, meaning that the debt service coverage ratio on the same rent today as five years ago could be below 1.0. As a matter of fact, I'll tell you a fact, if you had a $300,000 mortgage at a 3.5% rate back in 2022, and that had a 1.2 debt service coverage ratio, meaning there was rent being paid 1.2 times that payment. When that payment reset to 6%, just maybe a 2.5% increase, it puts you sub 1, meaning that all of a sudden the payment amount is greater than the rental payment that's coming in and the landlord is having to feed that payment. That's the reality of the market shift that happened. And then just in general, CRE is investment real estate. And investment real estate is subject to all of these myriad of things. And then there's trades, cost of goods, inflation on repairs and maintenance insurance costs through the roof if you can get it. By the way, this is all stuff that I talk about in the book, the store, which is coming out a few, if you're listening to this years later, still a great book. There are some smart operators that are talking about this. I am networking with folks that are seeing all the stages that are going on. Especially in the area of portfolios, loan portfolios, knowing the difference between a really well performing portfolio and a portfolio that may look like it's performing, but is subject to any myriad of the factors that could cause it to not be as performing. Or may just, you know, be a good partner. It's very easy to hide things in numbers and in large quantity. Know that we're in a new reality. That's what everyone's doing. That's smart, in my opinion. Like wake up and smell the roses if you happen to already. You know, we have-- don't count on the federal government, but we talk about that in the book. It's a reality. There may be something. But it also could be opening opportunities for people that like to buy distressed assets. And it's time to get down and get specific. I am re-underwriting every one of my assets these days on a more regular basis, thanks to AI. I can do it faster. And I can remember my nuances. And you've got to be prepared for uneven outcomes, too. I've been a lot of deals. And they don't all make money. And that's just the reality of it. That's the fact. Don't worry about it. But if you can-- maybe in the Hall of Fame, they say, you only need to bat 300 or 400. In the world of real estate investment, mortgage investment, I think it's kind of a reverse. You got to be better than average. Meaning you've got to hit more double singles, hits, and home runs more than half the time. And if you're up in the 600s or better or 800s, like we have been, then pretty much a Hall of Famer. But I'll say that I remember one of my mentors-- so I'll give his name out if he ever listens to John Sykes. He once said to me, when we took a loss on a piece of property, this is 15 years ago. I was very nervous because he was the money guy, right? And John said to me, listen, I had to tell him that I had screwed up-- I don't know that I had screwed up. And when the deal didn't work, we had additional costs. I came to him saying, we just sold this million dollar property and we're losing $50,000. And I was nervous. I was like, oh, I'm going to deal with this. And John said, you know what, Bill? It's OK. If you haven't taken a loss once in a while, you're not taking enough risk. That's very interesting. So that's one of the things to keep in mind-- one of the things I'm seeing a lot of smart operators doing these days is preparing for uneven outcomes and moving past with resilience. So hopefully we've discovered a little conversation about performance. We don't know what's going on inside private equity. I'm telling you the rates are double digits. We think that even the GSE loans that are the highest rated residential mortgage loans still have an inventory of 2 to 5 to 6% that is in some sort of limbo, not in foreclosure, performing, technically in default, but still paying. And then we know that FHA loans are double digit defaults, especially I think newly originally in the last five years. And then we know that CRE is only keeping their default rates low, which by the way, they are increasing almost near 5%. But the CRE is able to keep default rates low by, again, two standards. One, banks having the flexibility to rewrite the rules of the loan and keep it in a cruel status. And two, private lending coming in and taking over about half the industry, not really publishing any sort of statistics about the quality and performance of those loans. So maybe it's the question right now is not just whether a loan is performing. It's how is it performing? What's it going to look like if conditions don't improve from here? So a lot of the deals I've been seeing lately has been still wishful thinking. Thank you for listening to today's episode of The Det Doctor. If you like what you hear, please do subscribe as the free thing you can do to help build the audience. And I'll see you again next time. [MUSIC PLAYING] That's a wrap of today's episode of The Det Doctor. I enjoy bringing this content to you each and every week. And I really appreciate you tuning in. Remember to follow us so you get notified whenever new episodes release. If you haven't already done so, please share one of your favorite episodes with a friend, family, or colleagues. And if you don't mind, leave us a positive review on Apple's Spotify or whatever your favorite listening platform might be. 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