There are similarities, but the current downturn is different from the 2008 Great Recession. Following 2008, the U.S. mortgage servicing infrastructure was strengthened, and now, according to Urban Institute, those changes are going to be put to the test. In a report, Urban Insitute’s Karan Kaul and Laurie Goodman examine how these safeguards will protect homeowners.
The difference between now and 2008 is that homeowners have record levels of equity in their homes. The ratio of total mortgage debt outstanding to the value of the US housing stock is at a record-low 36%, compared with 54% on the eve of the Great Recession. According to Urban, what homeowners need right now is immediate payment relief.
Similar policies to 2008 are now being implemented in response to COVID-19 including forbearance, but, as Urban notes, if forbearance is not properly reported to the credit bureaus, it is treated as delinquency.
To reach more borrowers, Urban suggests expanding the LTV threshold for refinance options, including Fannie Mae’s High LTV Refinance Option and Freddie Mac’s Enhanced Relief Refinance Mortgage.
“This is a balancing act,” Urban notes. “Expanding refinance eligibility will have a negative effect on mortgage-backed security prices, which will, in turn, raise rates to new borrowers. But during a crisis period, such action seems warranted.”
While the loss mitigation toolkit we have in 2020 is much more robust than what we had in 2008, swift early intervention, even if imperfect, is much more effective than delayed actions.
“Although no one knows how serious the upcoming downturn will be or how long it will last, the need of the hour is to provide immediate payment relief to the largest possible number of borrowers,” Urban adds. “The lost opportunity has been to allow the streamlined refinance programs to mostly lapse, with no crisis-type provisions for immediate restoration.”