More than 33 million new unemployment claims have been filed. With job losses on that shattering scale, recovery won’t happen anytime soon, regardless of the scope of federal stimulus. As people fall behind on their bills, including mortgage and rent payments, an important question looms: Can we avert another foreclosure crisis?
We now know that the Great Recession that lasted from 2007 to 2009 was directly caused by irregularities in the mortgage market. Predatory and irresponsible lending — driven by glib assumptions that housing values would always go up — destroyed many communities, some of which are still pockmarked with vacant and abandoned houses. Courts were overwhelmed by foreclosure filings, and the resulting tangle gummed up, and slowed down, the economic recovery.
Grim statistics reveal the unique nature of that crisis: More people lost their homes during the Great Recession than lost their jobs. Poor or sloppy underwriting of loans, replicated on a massive scale, caused many to fail. And the banks, lenders and other loan servicers lacked effective processes to provide alternatives to foreclosure when the loans did fail.
No doubt this recession will take a different shape. It was caused by a pandemic, not by irresponsible lending. But how different will it feel for homeowners? Foreclosures are brutal. They upend families, forcing children to change neighborhoods and schools, and leave some homeless, with vacant and abandoned homes in their wake. These disruptions drag down the overall economy. And because the legal turmoil surrounding foreclosures can take years to resolve, the economic recovery is held back for everyone. Even after 11 years of sustained recovery from the last recession, housing values in some communities have yet to bounce back.
There are reasons to think things will go better this time. Congress and the Consumer Financial Protection Bureau have put in place rules that safeguard the mortgage market. Many of the worst lending practices have been outlawed. Mortgage loans today rest on sounder foundations.
Other changes have improved the process to resolve home loans gone bad. Banks and mortgage companies now recognize that foreclosure should be treated as a last resort. New rules for mortgage servicers require more consistent processes, with sensible options for homeowners who fall behind on payments. These options often include standardized approaches to modifying loans in hardship situations in ways that minimize the prospects of foreclosure.
So, the overall framework is improved. But will it be enough? With so many Americans suddenly unemployed, a huge number of homeowners will be unable to make their loan payments. Approximately 3.8 million households already are on forbearance plans, with more looming as monthly payments come due. And landlords with tenants who cannot pay their rent are in danger of defaulting on their own mortgages. The country could soon be inundated by millions of foreclosures, more than our improved systems can handle. After all, even the best modern building codes can be overcome by a massive earthquake.
During the Great Depression, the sheer scope of the economic distress overwhelmed the efforts to alleviate it, with half of home mortgages in default. Banks are better capitalized now, but many other companies that process mortgage payments are not. If they go belly up, then the process of transferring servicing to another company — never nimble even in the best of times — would lead to even more foreclosures, as confused homeowners struggle to understand their legal rights amid the snarl of corporate bankruptcies. What happened a decade ago could easily happen again, with the cumbersome foreclosure process impeding the housing market from regaining equilibrium.
Urgent steps taken right now could help mitigate this potential disaster. Mortgage payment deferrals need to be made available to all homeowners; the Cares Act helps only those with federally backed mortgages, leaving too many without relief. Forbearance plans must allow homeowners to repay what they owe gradually, not in one crushing lump sum. States should halt eviction cases temporarily — people cannot follow “stay at home” orders if they are ousted from their homes. Congress and regulators should expand funding backstops to keep mortgage servicers from going bankrupt. And the Consumer Financial Protection Bureau and state officials, who have the authority to supervise mortgage servicers, must ensure that servicers deliver crucial relief to homeowners at this time of extraordinary need. We must get ready for the trouble that is coming.