Attaining homeownership offers a gateway to wealth building, but it is only a first step. Sustaining ownership is key to long-term financial well-being. Many borrowers, however, have limited liquid financial resources to draw on in case of a costly expenditure or income loss. When savings are tied up in their home, borrowers are more likely to default when life shocks disrupt their ability to make mortgage payments. This brief explores how short-term liquidity solutions can help homeowners stay current on their mortgages. It updates earlier Urban Institute work on mortgage reserve accounts, scans a broader array of existing and emerging mortgage payment reserve products, and recommends demonstrations that could test and refine these tools.

Why This Matters

Research links most defaults and foreclosures to unexpected financial or life shocks. Furthermore, Black and Latino households experience more frequent income disruptions, higher housing costs, and smaller financial cushions, making them more likely to default and lose their homes. Temporary hardships are more common than catastrophic events, but even short-term disruptions can have long-lasting effects. Accessing some relief to buffer shocks can reduce the risk of falling behind on mortgage payments and of ultimately losing a home to foreclosure. With pandemic-era assistance programs having wound down, this brief argues that new liquidity solutions are needed to increase sustainability of homeownership and to narrow racial wealth gaps.

What We Found

The ability to tap funds to address temporary financial shocks can mitigate default risk. Key findings in this brief include the following:

• Liquid reserves are scarce for low-wealth buyers. The homebuying process itself can drain a household’s liquid reserves, particularly for first-time and first-generation buyers, who are more likely to be households of color than white households.
• Mortgage reserve accounts show promise but remain niche. Pilots by nonprofits and credit unions—such as matched emergency savings, seeded reserve accounts, and “pay yourself” mortgages—demonstrate how linked savings can support borrowers, but they are small scale and labor intensive and lack long-term performance data.
• Other liquidity tools offer important lessons. State homeowner assistance funds, unemployment-linked insurance (e.g., MassHousing’s MI Plus), home repair funding, and other payment assistance programs show that temporary payment relief can address financial shocks and reduce defaults. Vulnerable homeowners using forbearance along with short-term payment assistance are more likely to remain in their homes than those who receive only forbearance.
• Counselors see strong demand for preparedness tools. Interviews with housing counseling organizations confirm that most clients arrive in general financial distress and are unaware of existing loss mitigation options, underscoring the need for better savings supports and post purchase education.

Mortgage payment reserve products could disproportionately benefit households of color and other borrowers with limited wealth, while reducing risk for lenders.

How We Did It

We combined a literature review on liquidity, default, and racial inequities with updated quantitative analysis of reserve requirements and loan performance. Drawing upon our prior research on mortgage reserve accounts, we scanned the environment for additional programs and case studies and conducted interviews with program personnel who have designed, piloted, or implemented short-term mortgage payment relief and other assistance. We also incorporated qualitative insights from a focus group and interviews with national housing counseling organizations.