Distressed Housing Market: Current State and What to Do About It
The distressed housing market is rising, but agents can benefit by acting early on data trends. Prepare now to navigate foreclosure challenges effectively.
TABLE OF CONTENTS
If you sell, list, or invest in real estate, the next 6–9 months will reward the agents who treat distress like a data problem and act early.
TL;DR
- Foreclosure activity is rising, but it is controlled and regionally concentrated.
- Stress is heaviest in FHA and VA loans, especially in the South, Sunbelt, and parts of the Midwest.
- Expect a steady climb in notices through mid‑2026, not a sudden wave.
- Short sale pipelines should be built now. REO and auction volume will be measured but meaningful.
- Use delinquency data by loan type and geography to target efforts and timing.
What’s happening now
In the third quarter, there were 101,513 total foreclosure filings across the country, up 17% year over year, or roughly 1 in every 1,402 housing units. Of these, 72,317 were starts via Notice of Default or Lis Pendens, up 16% year over year. Completed foreclosures (REO) jumped 33% year over year to 11,723 in Q3, signaling fewer successful workouts and more cases moving to completion. The average foreclosure timeline fell 25% to about 608 days, suggesting faster throughput into 2026.
Where pressure is most intense
- By volume of starts: Texas, Florida, California, Illinois, New York lead.
- By rate: Florida, Nevada, South Carolina, Illinois, Delaware top the list.
- Hot metros: Lakeland and Cape Coral FL, Columbia SC, Ocala FL, and Cleveland OH show the highest filing rates.
- Smaller high‑stress markets: McAllen TX (~6.7% delinquency), Laredo TX (~10.3%), Baton Rouge and Lake Charles LA (>6%).
- Relatively insulated metros: West Coast majors and Northeast coastal markets generally sit in the 1.3–1.8% delinquency range.
Why government‑backed loans drive the story
FHA serious delinquency rose to 4.8% by early 2025, with total FHA delinquency around 10.57% as of Q2 2025. VA sits near 2.5%, while GSE loans (Fannie Mae, Freddie Mac) hover near 0.6%. Recent‑vintage FHA and VA loans (2022–2024) show elevated early delinquency, indicating more fragile borrower profiles. Conventional high‑LTV, lower‑FICO pockets are also showing early stress in overheated or disaster‑prone areas.
FHA hotspots
States with the highest FHA serious delinquency include Louisiana, Mississippi, West Virginia, Alabama, Texas, Arkansas, Indiana, Oklahoma, Delaware, and Maryland. Large metros with sustained pressure include San Antonio, Memphis, Houston, Birmingham, Baltimore, Philadelphia, and Atlanta. The pattern clusters in the South and Southwest, with secondary concentration in the Midwest.
After moratoriums ended
With the last major state and local moratoriums expiring in late Q3 2025, servicers are staggering actions to avoid shocking local markets and to prioritize loss‑mitigation options. Expect deliberate pacing, increased counseling in high‑delinquency regions, and streamlined modifications to prevent a sudden spike. The likely outcome is a steady, persistent rise in new notices through 2026, concentrated in identified regions and loan types.
Outlook through mid‑2026
Activity in Q4 2025 should build into Q1–Q2 2026 as backlogs clear and modification limits are reached. Judicial states (NY, NJ, FL, IL) will show delayed but then accelerated throughput; non‑judicial states (TX, CA, NV) will move faster. Anticipate the highest concentrations in Florida, Texas, Nevada, parts of the Carolinas, and judicial‑backlog states. REO completions could run 30–70% higher year over year at peak, putting quarterly completions in the ~15,000–20,000 range.
How banks will release inventory
Expect measured channels rather than a flood: bulk sales to institutions, online auctions for vacant and rural assets, and selective conversion of SFR to rentals or affordable units via public‑private programs. Vacant properties clear faster; rural and secondary markets will be prioritized where holding costs bite and price impact is most sensitive. Major metros and judicial states will release more slowly.
What to do about it
Short sale agents: Build pipeline now
- Track FHA and VA delinquencies by zip code to predict short sale opportunities 60–90 days ahead of filings.
- Engage servicer loss‑mitigation teams and counselors; become the trusted closer for repeat cases.
- Know your local loan mix. FHA/VA‑heavy areas have more low‑equity borrowers who fit short sale profiles.
REO agents and investors: Position for measured volume
- Prepare for varied channels: fall‑through short sales, trustee auctions, and bank‑owned REO.
- Match property profiles to investor strategies: rental conversion, fix‑and‑flip, or cash‑flow holds, especially in lower‑equity neighborhoods tied to FHA/VA defaults.
- Plan separately for judicial and non‑judicial states to align your timing and bandwidth.
Investors representing themselves: Set expectations
- Underwrite to realistic discounts. Many assets will be 10–20% below market with condition issues, not the deep discounts of 2008–2009.
- Build local deal flow relationships. Off‑market and bulk packages move to known buyers.
- Time your outreach to the cadence of servicer activity: year‑end clearing, early‑year legal resets, and Q1 pulses.
For everyone: Treat it like a data problem
Use loan‑type and geography data to decide where to focus. Track the metros and states above, monitor recent‑vintage FHA/VA delinquencies, and organize outreach before listings appear. The teams that prepare systems and relationships now will win predictable deal flow.
Distressed Housing Market: Current State and What to Do About It
The Bottom Line
Foreclosure activity is rising steadily across the U.S., but it's not a crisis yet. What we're seeing is a measured acceleration driven primarily by expiring pandemic-era protections and elevated delinquencies in government-backed loans. Servicers are being deliberate about how they move forward, staggering foreclosures to avoid shocking local markets. The distress is concentrated geographically, especially in the South and Sunbelt, rather than spread evenly across the country.
Here's what the data shows right now and what it means for your business.
WHAT'S HAPPENING RIGHT NOW
Q3 2025 Activity
In the third quarter, there were 101,513 total foreclosure filings across the country. That's a 17% increase from the year before and represents about 1 in every 1,402 housing units. Within that total, 72,317 properties began the foreclosure process through either a Notice of Default or Lis Pendens filing, which is the first public step. Those numbers are up 16% year over year.
What's particularly notable is that completed foreclosures (meaning properties that became bank-owned, or REO) jumped 33% year over year, reaching 11,723 properties in Q3 alone. That's a significant jump and tells us that fewer borrowers are successfully working through loan modifications or forbearance arrangements. When less people are escaping default, more properties move through to completion.
The time it takes to foreclose from start to finish has also gotten faster. The average timeline dropped 25% year over year to about 608 days. That matters because it means properties are moving through the system more quickly, and we should expect to see more activity ramping up as we head into 2026.
Where the Pressure Is Most Intense
Five states account for the majority of new foreclosures right now. Texas leads with 9,736 starts in Q3, followed by Florida (8,909), California (7,862), Illinois (3,515), and New York (3,234). But the highest rates relative to population tell a different story. Florida has the worst rate at 1 foreclosure filing for every 814 housing units. Nevada follows at 1 in 831, then South Carolina at 1 in 867, Illinois at 1 in 944, and Delaware at 1 in 974.
When you look at individual metro areas, the picture gets even starker. Lakeland, Florida is experiencing foreclosure filings at a rate of about 1 per 470 units. Columbia, South Carolina has 1 per 506. Cape Coral and Ocala in Florida, along with Cleveland, Ohio, are all showing rates above 1 per 600 units. These aren't just numbers. They represent neighborhoods with meaningful inventory pressure and price sensitivity.
Smaller metros in places like South Texas and Louisiana are particularly stressed. McAllen, Texas is at 6.7% delinquency. Baton Rouge and Lake Charles in Louisiana are both above 6%. Laredo, Texas is hitting 10.3%. These are smaller markets where a concentrated wave of distress hits harder. In contrast, the major West Coast metros like Seattle, Portland, and the Bay Area are seeing delinquency rates in the 1.3 to 1.8% range. Boston and other Northeast coastal markets are similarly insulated.
Why Government-Backed Loans Are the Problem
The real story here revolves around loan type. FHA mortgages are carrying serious delinquency rates (90 days past due) of 4.8% as of early 2025. That's roughly back to 2017 and 2018 levels, well below the 2020 pandemic peak but still elevated. Compare that to loans from Fannie Mae or Freddie Mac, which are sitting around 0.6%, and VA loans at 2.5%. GSE loans are performing fine. FHA and VA are where the stress is concentrated.
What's especially concerning is the vintage of these loans. When you look at FHA and VA originations from 2022 through 2024, they're showing much higher early delinquency rates than older loans or GSE loans from the same period. This suggests that lending standards may have been looser on recent vintages, or that borrowers who took out these loans more recently are financially more fragile. By December 2024, about 17% of all delinquent FHA loans came from just the last two years. Before the pandemic, that number was only 10%.
Conventional loans with high loan-to-value ratios and low credit scores are also starting to show early default problems, particularly in markets that saw overheated price appreciation or disaster-prone regions.
FHA Delinquencies and Where They're Highest
FHA serious delinquency rose from 3.7% in mid-2024 to 4.8% by early 2025. That total delinquency (not just the seriously delinquent portion) is running at 10.57% as of Q2 2025. The states with the highest concentrations are Louisiana at 5.8%, Mississippi at 5.7%, followed by West Virginia, Alabama, Texas, Arkansas, Indiana, Oklahoma, Delaware, and Maryland, all above 3.4%.
Large metros like San Antonio, Memphis, Houston, Birmingham, Baltimore, Philadelphia, and Atlanta all have delinquency rates above 3.4%. These are major markets where you're seeing sustained pressure. The smaller metros (McAllen, Baton Rouge, Lake Charles, Laredo) are hitting extreme rates on a per capita basis.
The pattern is clear: FHA distress is heavily concentrated in the South and Southwest, with secondary concentrations in the Midwest. This makes sense given population migration patterns and economic conditions in these regions over the past few years.
The Moratorium Ended and Here's What's Happening
The last major foreclosure and eviction moratoriums at the state and local level expired in late Q3 2025. These had been holding back a backlog of cases that would have otherwise moved through the system. Now that they're gone, banks and servicers are facing a choice about how to release that backlog. The good news is they're being smart about it.
Large servicers aren't trying to dump everything at once. Instead, they're staggering actions carefully, both to avoid destabilizing local markets and to follow through on loss mitigation options. What we're seeing from banks is a focus on getting counselors into high-delinquency regions, particularly in the Southeast and Sunbelt. They're also streamlining loan modifications and moving borrowers out of forbearance into permanent modifications where possible.
Fannie Mae and FHA have both increased their monitoring of loans that are exiting forbearance and have adjusted how they prioritize loss mitigation alternatives. They're essentially trying to keep actual foreclosures from spiking all at once. The regulatory coordination suggests there's real awareness of the risk to vulnerable communities.
This controlled approach means you won't see a sudden wave. Instead, expect a slow, persistent increase in new foreclosure notices through 2026, particularly in the regions and loan types we've already identified.
What to Expect from Now Through Mid-2026
The uptick we're seeing now in Q4 2025 will intensify through Q1 and Q2 of 2026. This is when most forecasters expect the peak activity, driven by a combination of moratorium backlogs clearing and loan modifications exhausting their limits. The judicial states like New York, New Jersey, Florida, and Illinois will see delayed but then accelerated activity due to slower court timelines. The non-judicial states like Texas, California, and Nevada will move faster but likely show more volume.
The regions most likely to see NOD spikes are judicial backlog states (New York, New Jersey, Florida, Illinois), Sunbelt non-judicial states (Texas, California, Nevada), and economically stressed Midwest metros like Cleveland, Chicago, and Indianapolis. We should expect the highest probability of concentrated filings in Florida, Texas, Nevada, portions of the Carolinas, and those judicial backlog states sometime between late Q4 2025 and early Q1 2026.
REO volumes (completed foreclosures becoming bank property) are expected to increase somewhere between 30% and 70% year over year in the coming year. For context, Q3 2025 saw 11,723 REO completions. A 30% to 70% increase would put 2026 peak quarters in the 15,000 to 20,000 range. That's meaningful but not catastrophic.
How Banks Will Release Inventory
Banks aren't planning to flood the market with properties. Instead, they're likely to use several channels to dispose of REO inventory in a measured way. A significant portion will be sold directly to institutional buyers and investors in bulk packages, which speeds liquidation but bypasses the traditional MLS and owner-occupant buyers. Auctions, particularly online auctions, will continue to be a major channel, especially for vacant and rural properties.
There's also a growing policy push toward converting some foreclosed single-family homes into rentals or affordable housing through government partnerships and tax incentives. Various state and local initiatives are specifically trying to steer some REO toward rental conversion specialists rather than back onto the for-sale market. This actually helps limit MLS saturation.
Properties that are vacant clear much faster than occupied ones, so you'll see those hit the market first. Banks are also using more technology platforms and auction partners to move inventory faster and reduce their asset management overhead. Geographic prioritization matters too. Expect rapid disposition in high-distress rural and secondary markets where holding costs are highest and price impact is most sensitive. Major metros and judicial states will see slower, more measured release.
WHAT TO DO ABOUT IT
For Short Sale Agents: Building Your Pipeline Now
Your window to build a strong short sale pipeline is right now, through Q1 2026. This is the period when servicers are being most aggressive with loss mitigation and borrowers still believe they can avoid foreclosure. Once you get into Q2 2026 and beyond, borrowers become more resigned and servicers are further along in the foreclosure process. Short sales are hardest to execute when borrowers have already psychologically given up or when servicers are deep into their legal timelines.
Start mapping delinquency trends in your market right now, particularly looking at FHA and VA loans. These are your leading indicators. When you see FHA delinquencies rising in a specific zip code or neighborhood, that's where short sale opportunities are going to follow in the next 60 to 90 days. Don't wait for the foreclosure notice to hit the public record. If you have relationships with loan servicers, title companies, or mortgage brokers, use those to get early visibility on delinquent borrowers before they go into active foreclosure. This is where short sales get easier to do, because borrowers still have options and time to work through the process.
Build relationships with the loan servicers operating in your market. Once moratoriums expired, many of them ramped up their counselor networks and loss mitigation teams. They're looking for agents who understand short sales and can help move cases. If a servicer trusts that you'll handle a short sale professionally and close it without complications, they're more likely to work with you on multiple transactions. This is a relationship business, and the servicers who are good at their job are already thinking about which agents they can count on for volume.
Also understand the loan mix in your area. If your market is heavy on FHA and VA loans, those borrowers often have less equity and may not be able to sell quickly on their own. They're natural short sale candidates. If your market has more GSE loans, those borrowers are usually in better financial shape and less likely to need short sales. But watch the newer conventional loans with high LTVs and low credit scores. Those pockets can surprise you with distress.
For REO Agents and Investors: Positioning for Volume
The measured release of inventory by banks actually works in your favor if you're organized. Banks aren't going to flood the market, which means less competition and better negotiating positions for professional buyers and agents. You'll see bulk packages being offered to institutional buyers, but there's plenty of individual REO going to hit the market through regular channels, and there will be auction opportunities with inventory moving faster than in recent years.
Get comfortable with the fact that the properties coming to market won't all be in the same stage. Some will come from short sales that fell through. Others will come from active foreclosure auctions. Still others will be bank-owned REO being liquidated. Your job is to understand which properties fit which channels and which investor profiles.
Focus on understanding the underlying loan types and borrower profiles. Properties that come from FHA and VA defaults will be in lower-equity, lower-income neighborhoods. These are great targets for rental conversion, fix-and-flip strategies, or buy-and-hold for investors looking at cash flow. The smaller metro areas, while having lower absolute numbers, actually have less competition. If you know investors interested in Memphis, Baton Rouge, or Indianapolis, these are places where consistent deal flow can matter.
Track the judicial states separately in your planning. New York, New Jersey, Florida, and Illinois have slower court timelines, which means the backlog will clear more gradually. This creates a longer window of opportunities rather than a short spike. Non-judicial states like California, Nevada, and Texas will move faster, so you need to be quicker on identifying and moving on deals.
The key is treating inventory flow like a data problem. Know where properties are coming from, know the timeline they're moving on, and know which of your clients or investors match which properties.
For Investors Representing Themselves: Setting Realistic Expectations
Start understanding what a distressed property is actually worth in your market. Get comps on recent foreclosure sales, short sales, and REOs. Know what repair costs are likely to be. The properties coming through now aren't crisis-level distressed like you might have seen in 2008-2009. Many borrowers still have significant equity or the loans are insured by FHA or VA. This means prices won't crater. You're looking for 10 to 20 percent below market value on properties that need work, not 50 percent discounts. Set realistic expectations.
Also build your network with local agents, wholesalers, and other investors who are tracking these properties. The best deals often move off-market. Bulk packages from servicers go to people who have existing relationships. Online auctions and MLS listings are fine, but if you want first look at inventory, you need to be known in the local distressed property community.
Understand the timing too. The activity level we're going to see won't be evenly distributed. It will pulse. You'll see spikes in November and December as servicers clear year-end cases. There will be another spike after New Year as legal timelines reset. Q1 will be particularly active. Then there might be a brief slowdown in spring before another push in late spring and early summer. This rhythm matters because it affects when you should be marketing hardest and when to expect more inventory.
For All Agents: The Data Is Your Tool
The key to making money in this environment is being early, being organized, and being strategic about where you focus your energy within your existing market. Banks and servicers are managing this deliberately, which actually makes it more predictable than a true crisis. You can track the data, understand the patterns, and position yourself before the rush.
Use FHA and VA default trends as early warning signals for where local distress is building. Watch high-LTV, low-FICO conventional pockets too, especially in recent vintage originations. The metros and states we've identified are your priority zones. If you're in one of those areas, you know distress is coming. If you're not, you still have time to build relationships and understand the patterns before activity accelerates.
The agents and investors who treat this like a systematic business rather than just waiting for listings to appear are going to win. Know your market's specific exposure. Understand which loan types dominate your area. Build the relationships that give you early visibility. And execute professionally when opportunities show up.
Data current as of October 14, 2025
Sources
- Real Estate Market Research | 10/14.1
- Lender Letter LL‑2025‑01 (Fannie Mae).2
Data current as of October 14, 2025
Join the community
Looking for weekly playbooks, scripts, and live training on short sales, REO, and auctions? We run a practitioner community focused on winning distressed opportunities. It is low‑noise, practical, and built for accountability.
Subscribe for new posts
Get actionable distressed‑market insights and playbooks in your inbox each week. [Subscribe link goes here]