Foreclosure inventory is rising but still well below pre-pandemic levels. That gap is reshaping how private lenders operate
The residential transition lending (RTL) market is holding up, but the mix of business inside it has shifted considerably. Private lenders who are still waiting for distressed inventory to recover the way it did after the last cycle may be waiting a while.
According to the April 2026 ICE First Look at Mortgage Performance, there were 37,000 foreclosure starts in April, up nearly 26% year over year, and 276,000 loans in active foreclosure, up 32% from a year ago. Both figures are rising, but they remain well below pre-2020 norms, and the distressed property supply that residential transition lenders depend on has not returned at scale.
With fewer distressed properties to buy and renovate, private lenders and their borrowers have been turning to ground-up construction to fill the gap. That shift is now showing up in the composition of RTL portfolios across the industry.
Ben Fertig (pictured top), founder and president of Constructive Capital, said what is happening in production data reflects something structural, not cyclical.
"Ground up is becoming a bigger portion of RTL," Fertig told Mortgage Professional America. "Because opportunities that used to exist with distressed inventory just aren't there. It's a little better. There's a little more foreclosure inventory than there was. But we're not even anywhere near pre-COVID level."
Chasing the same borrower
A wave of new capital has entered the RTL market over the past two years, drawn by improving securitization structures and better liquidity. Fertig said the influx has created a crowding problem that is starting to put pressure on lenders at the edges of the market.
"Everybody really is kind of chasing the same borrower, which makes it tough," he said. "Around the edges, ultimately, some of that liquidity is going to have to take more risk than what has been market risk over the last few years."
Fertig does not see ground-up's growing share of RTL reversing until there is a meaningful change in distressed housing supply.
"I just think that until you get an ample amount of distressed inventory out there, you're going to see ground up just continue to become a bigger part of RTL," he said.
The rising foreclosure numbers in the ICE data are worth watching, but Fertig said the equity picture gives him confidence that a wave of distressed supply is not imminent. Homeowners today are in a fundamentally different position than they were after the 2008 financial crisis.
"After the global financial crisis, everybody strategically defaulted because you didn't have any equity," he said. "Now you're like, ‘Wait a minute, if I let this thing go, I'm probably going to walk away from a lot.’ So I think you haven't seen that inventory that's out there, even though it's ticking up a little bit."
Advice for new commercial brokers
For commercial brokers considering RTL or ground-up construction, Fertig said the starting point is finding the right capital partner. A residential transition loan is operationally different from a conventional loan in ways that matter. Entity lending, inspection draws, and construction holdbacks all require processes that not every lender has built out.
"There should be a seamless transition," he said. "Because you're maybe not used to lending to an entity, for instance. Then you've got the extra inspections, you've got the construction component of the loan, you've got the holdback. The right capital providers have those things in place. I would advise that you work with somebody who does."
Brokers coming from conventional lending also need to accept that RTL underwriting involves more judgment than they are used to. Fertig said the brokers who understand that upfront tend to get better outcomes than those who fight it.
"You have to expect the subjectivity that comes with RTL," Fertig said. "If you really want to dig into this asset class, get the best terms and scale it, you've got to be ready for that subjectivity. You can't just get frustrated with it."
RTL lenders tend to be more flexible on file quality than debt-service coverage ratio (DSCR) lenders, Fertig said, because the asset class involves more deliberation throughout the credit process by design.
"Transparency is super important," he said. "You can push back where you don't think things are rational. But embrace the subjectivity versus fight it, because if you look at how these loans are risk managed throughout the credit process, it's just not all data."
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This article is part of our Monthly Spotlight series, which in June focuses on residential and commercial construction. Full coverage can be found here.
