Mortgage forbearance has provided immense relief to homeowners during the COVID-19 pandemic. But for many borrowers, it will end in the next few months, and when it does, attention will shift to the adequacy of the loss mitigation toolkit. Industry experts will naturally look to the Great Recession for guidance and lessons learned. When they do, it is imperative they realize the differences between the two economic crises.
The top-line numbers reveal that although delinquencies were high during both crises, in the fourth quarter (Q4) of 2020, the serious delinquency (SDQ) rate—which is when borrowers are 90 or more days past due or in foreclosure—was about half of what it was at the peak of the Great Recession in Q4 2009. And the statewide variation in the SDQ rate was much more variable in Q4 2009 (ranging from 2.46 to 20.43 percent) than they were in Q4 2020 (ranging from 2.95 to 7.67 percent).
Understanding the differences between the crises and the resulting SDQ rates will be essential for developing unique, tailored policy solutions that can effectively mitigate loss.
To understand the differences between the crises, look at home price appreciation and unemployment rates
Two variables are important in explaining mortgage delinquencies and foreclosures: negative equity and unemployment. Data show these variables behaved differently during the Great Recession versus the COVID-19 pandemic.
During the Great Recession, Black Knight data indicate home values plummeted by 25 percent from the 2006 peak to the 2012 trough. Since 2012, they have increased 73 percent, bringing home values 29 percent above the previous peak. And in just the past year, even while the pandemic was raging, home prices increased by 11 percent.
During the Great Recession, the unemployment rate rose from 4.5 percent in December 2006 to 10 percent in October 2009. The recovery was slow, reaching 6.9 percent in 2013 and 3.5 percent in early 2020, just before the pandemic. By contrast, the COVID-19 unemployment shock was much larger, and the recovery was more robust, with the unemployment rate increasing from 3.5 percent from February 2020 to 14.8 percent in April 2020, then declining swiftly to 6.9 percent in October 2020 and 6.1 percent April 2021. That said, the unemployment rate held steady from March to April 2021, suggesting future job growth may be more gradual.
These variables have a large influence on state-level SDQ rates. During the five years preceding Q4 2009, the SDQ rate and home price appreciation had a strong negative relationship. Home price appreciation alone explains about 58 percent of the differences in SDQ rates between states. By contrast, this relationship was weak in Q4 2020.
By contrast, the unemployment rate has been highly predictive in both periods. A simple regression shows that for both periods, a 1 percent increase in the unemployment rate at the state levels adds 0.42 to 0.43 percent to the SDQ rate (regression results available upon request). Home price appreciation had a sizable effect during the Great Recession but no effect during the pandemic.
We anticipate loss mitigation policies, especially payment deferrals (which were unavailable during the Great Recession), will keep most borrowers in their home as they exit forbearance. Rising home prices both provide an incentive for people to stay in their homes and enable them to do so. Nearly 70 percent of borrowers rolling off forbearance in recent months are opting for either a payment deferral—in which mortgage payments remain at the pre pandemic level and the forborne payments are added to the end of the life of the mortgage—or a mortgage modification, allowing for a payment reduction. In addition, moving payments to the end of the mortgage will still provide most homeowners with positive equity if house prices have risen.
Homeowners’ positive equity position drastically increases the likelihood of an orderly home sale for those unable to maintain even a modified payment. Though some borrowers inevitably will not have enough income to maintain a payment, even with a modification, and will lose their home, most of these borrowers could sell in the open market. This is very different from the aftermath of the Great Recession, when the country had widespread distressed inventory. At the time, policymakers paid considerable attention to enhancing foreclosure alternatives for borrowers in negative equity, including short sales and deeds in lieu of foreclosure. These options, while less disruptive to both borrowers and neighborhoods than real-estate-owned sales, did not assure the homes were sold at the highest possible price. In the pandemic’s aftermath, industry participants will need incentives to make sure borrowers with positive equity received necessary help to maximize the sale price of their home.
Finally, this analysis has implications for the length of the foreclosure moratorium. Our analysis suggests that the forbearance moratorium should remain in effect while unemployment is relatively high. As the vaccine rollout continues, schools reopen in September, people go back to their offices, and the economy continues to reopen, the unemployment rate will likely fall, allowing more borrowers to exit forbearance and resume mortgage payments in full or in a reduced amount.
The COVID-19 crisis is very different from the Great Recession; home price appreciation has become an asset, and unemployment has been the sole economic disruptor. Policymakers can ensure the loss mitigation toolkit recognizes this crucial distinction.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.