Why this article is important: In 2026, mortgage delinquencies are on the rise, especially in lower-income areas of California. As we look ahead to 2027, expect foreclosure related transactions to re-emerge in the housing market as a force confronting real estate service providers.
Mortgage delinquencies and the income gap
The share of mortgaged homes 90 or more days delinquent on payments is at its highest in a decade, reported by the New York Federal Reserve Bank’s Q4 2025 Household Debt and Credit Report.
The share of mortgage debt 90+ days delinquent increased to 1.38% in Q4 2025, up from 1.09% a year earlier. Further, the share of home equity lines of credit (HELOCs) 90+ days delinquent increased to 1.24% in Q4 2025, up from 0.56% a year earlier.
However, when looked at through the lens of different income classes, the mortgage delinquency picture becomes even more problematic.
For example, the lowest income quartile of mortgaged homeowners has experienced a rapid increase in 90+ days of delinquencies, rising to 3.0% in Q4 2025. In contrast, the highest quartile of mortgaged homeowners experienced a delinquency rate of just 0.7%.
Much of this difference is due to a larger reliance on employment income in the lower-income group of homeowners. Further, lower-income homeowners tend to be located in regions which experience higher unemployment rates, according to the New York Fed analysis.
Still, the report stresses the high credit standards that define today’s homeowners (as they are actually qualified to make FRM payments). Contrast today’s relatively stable credit picture with the Millennium Boom-era, when homebuyers took out predatory ARM mortgages and became fine scapegoats for the last foreclosure crisis.
Editor’s note — During the Millennium Boom, homeownership exploded as tenants-by-nature were enticed to become homeowners (to satisfy Wall Street’s demand for mortgages to securitize). Also, property owners of all sorts were given motivation to refinance. The answer to both difficulties came exclusively with the overuse, and exploitation, of risky adjustable rate mortgages (ARMs). When these ARMs inevitably reset, payments leaped, eliminating ownership for over 1.1 million California homeowners in the foreclosure crisis which peaked in 2010.
Today’s high credit standards provide a shield against another such foreclosure crisis. Still, anytime economic volatility results in lower job rates — and when home equity is lost due to a reduction in home prices — delinquencies (and foreclosures) take on a greater presence in the real estate market.
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Foreclosure timeline
California is a nonjudicial foreclosure state, commonly called a trustee’s foreclosure sale. In other words, the mortgage holder’s debt collection is not enforced by a judicial (court) process to foreclose on a delinquent mortgage, called a sheriff’s sale.
The nonjudicial foreclosure process comprises:
- First, the property owner is delinquent on their mortgage payments. This means a property owner has missed at least one payment. However, a mortgage servicer is very unlikely to classify a mortgage as delinquent before the payment is at least 30 days past due. On senior mortgages secured by a homeowner’s principal residence, the mortgage is 120 days past due before the mortgage holder proceeds to the next step in the foreclosure process. [12 Code of Federal Regulations §1024.41(f)(1)]
- The mortgage holder records a notice of default (NOD), sending a copy of the NOD to the property owner. On one-to-four unit residential properties, a separate summary of the NOD is attached. Once recorded, the NOD officially begins the foreclosure process. [See RPI Form 471]
- The property owner’s right to cure money defaults and reinstate the mortgage ends on the last day before five business days prior to the date the trustee’s sale is held. The reinstatement period lasts for a minimum of three months and 20 days following recording of the NOD, running until the redemption period begins. During the reinstatement period, the owner stops the foreclosure process by paying the delinquent payment amounts, and trustee’s costs and charges. When owners are unable to pay the amounts due, they best use the time to research foreclosure alternatives. [Calif. Civil Code §2924(3)-(4)]
- The mortgage holder records a notice of trustee’s sales (NOTS) at any time following three months after the NOD is recorded. The NOTS is posted on the property itself and published in an authorized news publication within the property’s court jurisdiction. On one-to-four unit residential properties, a separate summary of the NOTS is attached to the NOTS. The summary is not published.
- The owner’s redemption period begins five business days before the foreclosure sale is set to take place, continuing until the trustee’s sale is completed. During the redemption period, the property owner may stop the foreclosure process by paying the entire remaining balance on the mortgage and all other amounts due, including trustee’s foreclosure charges.
- The foreclosure sale takes place and the trustee’s deed is prepared and recorded, vesting title in the name of the buyer at the trustee’s sale.
The entire process typically takes around eight months and runs much longer during recessionary periods when foreclosure numbers rise and loan modification negotiations take place.
Editor’s note — The mortgage holder and servicer rarely pursue the alternative judicial foreclosure sale to collect the debt. Learn more about the judicial foreclosure process.
When an SFR tenant-occupied property is the subject of a completed trustee’s foreclosure sale, the new owner must honor an existing fixed-term lease. However, when the home is to be owner-occupied as a principal residence, the new owner may serve the tenant with a 90-day eviction notice to end the existing occupancy. [CC §2924.8(a)(1)]
Foreclosure alternatives
At the tail end of the 2008 foreclosure crisis in 2012, California’s Homeowner Bill of Rights was enacted. The new rights gave mortgaged homeowners who become delinquent a meaningful opportunity to retain their home by making the foreclosure process fair when financial difficulties are experienced.
For example, the bill prevents:
- dual-tracking foreclosure, when the mortgage servicer is simultaneously in the foreclosure process and reviewing an application for mortgage modification;
- robo-signing foreclosure documents, as automation heightens the occurrence of wrongful foreclosure; and
- more than one point of contact, which acts to mislead homeowners in the foreclosure process. [CC §§2923.7; 2923.5; 2924.13]
Violations of foreclosure law by mortgage servicers may result in money paid to the homeowner, sufficient to cover “economic damages.” This amount includes attorney fees and court costs. [CC §2924.12]
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Another alternative to loss of a home to a foreclosure sale is a short sale. In this arrangement, the owner enters into a purchase agreement with a buyer the owner locates using a buyer agent. Here, the homeowner agrees to sell the home at a price (FMV) which is less than is the amount owed on the mortgage. However, the transaction is subject to the mortgage holder agreeing to a discounted payoff of the mortgage debt.
The benefit for the homeowner who later seeks to borrow money is a lesser ding to their credit and less time before they qualify for a new mortgage compared to losing the home at a foreclosure sale.
For the mortgage holder’s benefit, a short sale skips the operational hassle of taking title to the property as real estate owned (REO) property on their books, as well as the cost of delays in completing a foreclosure and efforts to eventual resell the REO property.
On the other hand, a forbearance agreement entered into by the mortgage holder and the homeowner allows the homeowner to ultimately retain title to their property.
A forbearance agreement temporarily reduces monthly mortgage payments to allow a homeowner undergoing financial difficulties to bring the mortgage payments current without altering the terms of the mortgage. These are more frequently considered by lenders.
Unlike other assistance measures, forbearance agreements are economically beneficial only to homeowners at serious risk of foreclosure. Lenders who use forbearance agreements can thus direct their resources where they will be most effective — foreclosing on the insolvent homeowners who do not or cannot locate a buyer for a short sale.
Editor’s note — In some instances, servicers are compelled by law to offer forbearance agreements to avoid foreclosure. For example, servicers need to provide at least 12 months forbearance to homeowners affected by the 2025 Los Angeles-area wildfires. This requirement is often extended in other emergency-type situations.
Related article:
Mortgage forbearance for homeowners affected by 2025 wildfires
A deed-in-lieu of foreclosure is an alternative occasionally pursued when the homeowner and their buyer agent are unable to negotiate and close a short sale. Commonly called a “friendly foreclosure,” a deed-in-lieu occurs when the property owner agrees to grant title to the mortgage holder in exchange for canceling the entire mortgage debt.
For the mortgage holder, a deed-in-lieu of foreclosure saves time and money. When negotiated early in a delinquency, the mortgage holder eliminates the costs of an inevitable foreclosure sale and the owner no longer retains possession until foreclosure or a later eviction. Further, mortgage holders sometimes will offer relocation assistance to shorten the time for resale of the property and reduce losses.
After foreclosure
For homeowners:
When a property sells at a foreclosure sale for less than the amount owed on the mortgage, the difference is initially considered taxable income received by the owner on the loss of the home. This difference is called discharge-of-indebtedness income by the Internal Revenue Service (IRS), and cancellation of debt by California’s Franchise Tax Board.
However, from time to time, when foreclosure numbers rise, the taxation of debt forgiveness — discount — is temporarily paused. More important and fully overriding the taxation of debt forgiveness, nonrecourse debt as established and long-standing in California mortgage law when discounted on a payoff is never taxable. When a mortgage is nonrecourse, the homeowner wiped-out by a foreclosure sale does not report any discharge-of-indebtedness income when filing their state and federal tax returns. It’s not income, as it is in many other states.
A foreclosure or short sale resulting from a default on the mortgage remains on an individual’s credit report for seven years following the foreclosure. There is a mandatory waiting period — a penalty demanded by mortgage lenders of the credit agencies — to buy following a foreclosure or short sale, whether or not you have a permanent job, which is:
- seven years following foreclosure; or
- two years following a short sale.
A deed-in-lieu is reported similarly to a short sale on the individual’s credit report.
For mortgage holders:
When a home fails to sell to a third-party buyer at foreclosure sale, the mortgage holder becomes the successful bidder acquiring title. As the new owner, the mortgage holder takes on a balance sheet item termed real estate owned (REO) property.
More than red marks on a balance sheet, REOs are costly to carry and unwieldly assets the mortgage holder is not structured operationally to maintain. Mortgage holders hire real estate brokers to manage the REO as physical property and market the REO as available for sale and locate a buyer to acquire it.
The last time REOs were a significant presence in the housing market was in the years following the 2008 recession and foreclosure crisis. In 2009, REO resales made up a whopping half of all home sales in California. This phenomenon required brokers and agents to deal with owners who generally lacked representation by a seller broker and needed training about real estate negotiations and practices.
Anti-deficiency rules protect homeowners
California is well understood by mortgage lenders since the 1930s as an anti-deficiency state. Lenders are barred from judicial recovery of any deficiency in the value of the security, except for waste, to cover mortgage debt which funded the purchase by a buyer-occupant of a one- to-four unit residential property. This type of purchase assist funding secured by the real estate is considered nonrecourse.
Additionally, any mortgage holder secured by any type of real estate is prohibited from collecting a deficiency in the value of the real estate to satisfy a recourse debt when the foreclosure is conducted as a trustee’s foreclosure sale. Waste of the property value by conduct of the owner is recoverable when the mortgage holder underbids at the trustee’s sale.
For example, consider a homeowner delinquent on an equity mortgage secured by the property. The homeowner owes $100,000 on the second mortgage. However, their property’s fair market value (FMV) is insufficient to cover the amount of the first and second mortgage. They are indebted — insolvent — by a condition called negative equity, or underwater.
Unable or unwilling to successfully pursue a foreclosure alternative, the second mortgage holder initiates a trustee’s foreclosure on the property, selling their secured position junior to a first mortgage to the highest bidder for $50,000 at a trustee’s sale.
May the mortgage holder pursue the foreclosed homeowner personally to collect the $50,000 deficiency to fully satisfy the recourse debt?
No! The mortgage holder is unable to collect on the deficiency even though the debt owed them is recourse. To collect by a court awarded money judgment, they had to foreclose judicially and proceed to a sheriff’s sale with a one-year redemption period after the sale.
The home was sold using provisions in their trust deed mortgage to foreclose nonjudicially at a trustee’s sale. The mortgage holder’s only source of recovery of a recourse debt on a trustee’s foreclosure sale is the real estate that secures the debt. [California Code of Civil Procedure §580b(a)]
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