The Foreclosure Comeback: Residential and Commercial Risks for Lenders and Servicers

Chris Willis (0:05)

Welcome to the Consumer Finance Podcast. I'm Chris Willis, the co-leader of Troutman Pepper Locke's Consumer Financial Services regulatory practice. And today we're going to be talking about the comeback of foreclosure actions, both residential and commercial, and the implications that has for financial services companies in litigation and otherwise. But before we jump into that topic, let me remind you to visit and subscribe to our blogs, troutmanfinancialservices.com and consumerfinancialserviceslawmonitor.com.

And while you're at it, please check out all of our other great podcasts, the FCRA Focus, the Crypto Exchange, Payments Pros and Moving the Metal. All of those are available on all popular podcast platforms. And speaking of those platforms, if you like this podcast, let us know.

Leave us a review on your platform of choice and let us know how we're doing. Now, as I said, today we're going to be talking about foreclosure, both residential and commercial, how it's made a resurgence and what that means for the industry. And joining me to talk about that are four of my partners. Three partners from our Consumer Financial Services Group, Erin Edwards, Jason Manning and Joe DeFazio, and a special guest, Matt Brooks from our Bankruptcy and Restructuring Practice Group here in Atlanta with me. So welcome to the podcast and thanks for being here.

Erin Edwards (1:16)

Thanks Chris. It's great to be here.

Jason Manning (1:18)

Glad to be back, Chris.

Matt Brooks (1:19)

Thanks Chris. Good to see you.

Joe DeFazio (1:20)

Thanks Chris.

Chris Willis (1:21)

Okay. So let's jump right into it. Erin, let me start with you.

For those of us who lived through the surge in foreclosures that followed the 2008 recession and were a part of that recession, and then saw us sort of come out of it with very low foreclosure rates after that, and then probably even lower foreclosure rates because of low loan delinquencies during COVID-19 because of all the government stimulus that was happening, foreclosure kind of seemed like a thing of the past. But the numbers right now are telling a very different story in 2026 in that we've seen these foreclosure rates, both commercial and consumer start to rise again, and with that rise in rates comes a rise in legal risks for the industry.

So Erin, it seems to me that the Rust Belt and the Mid-Atlantic regions of the country seem to have a higher incidence of this phenomenon than other parts of the country. Why is that?

Erin Edwards (2:16)

That's right, Chris. We're really seeing foreclosure activity concentrating right now in a handful of markets that are clustered in the Rust Belt and the Mid-Atlantic. Dayton, Ohio is sitting at about 6% foreclosure rate, Pittsburgh is about 5.3%, Baltimore 5.1%, Philadelphia 4.7%.

Of course, those are not just small numbers, they represent a meaningful departure from the national baseline. It's not just the rates, REO sales, so properties that lenders are taking back or are now selling, those are up roughly 45% year over year in Q1 of 2026

Foreclosure listings are approaching 1.3% of national inventory. We're not just talking about a hypothetical turn of the year, this is showing up in real transaction data. Of course, the question is, why these markets? It's really a structural issue. These are regions with older legacy housing stock. The post-vandemic recovery has been slower there than the state of Sunbelt or Mountain West. If you have population dynamics such as migration, softer employment growth that make these communities more vulnerable to the kind of economic stress that leads to a mortgage default. It's not just one thing but a combination of factors that make these markets structurally less resilient.

Chris Willis (3:34)

Well, Erin, one of the hallmarks of the legislative and regulatory reaction to the surge in foreclosures that started in 2008 was the emergence of a lot of different state laws governing the foreclosure process for residential mortgages.

And so all the states in the areas that you talked about have laws like that. So if you're a servicer that's operating in, say, New York, Pennsylvania, Ohio and Maryland, all at the same time, how do you practically manage the four very different sets of procedural requirements for foreclosures in those different states?

Erin Edwards (4:09)

I can say the answer is really that it's challenging. It's one of the things that makes servicing in this part of the country just very challenging. And it's honestly one of the biggest compliance traps that we see. You've got four states in close geography that each has their own procedural regime for foreclosure. And they're not just a little different, they're fundamentally different in how they work. New York has a mandatory settlement conference and extended borrower protections that can stretch timelines out. Pennsylvania requires compliance with Act 91 notice requirements before you can even initiate foreclosure.