Because this housing crisis is not like the last

Dive mortgages have given way to large home equity cushions, especially after prices have soared over the past couple of years.

A 28% drop in US home prices between 2006 and 2009 dropped the value of about 11 million homes below their mortgage balance, triggering widespread defaults, a near-collapse of the financial system and a profound recession. According to a CoreLogic analysis, home prices would need to fall 40% to 45% from their peak for the same percentage of mortgaged homes to sink today.

Note: Data for single-family homes includes single- and four-family homes with mortgages. Domestic wealth is calculated from the value of households and the non-financial corporate sector.

Source: Urban Institute

Peter Santilli/THE WALL STREET NEWSPAPER

September 2008
The federal government takes control of Fannie Mae and Freddie Macinitiating a transformation of the mortgage giants, who now drive much of the mortgage market.

July 2010
The Dodd-Frank The Wall Street Reform and Consumer Protection Act, a major overhaul of the financial system, becomes law.

February 2012
The federal and state governments reach a conciliation with major banks for billions of dollars for abusive seizures, one in a series of penalties imposed on banks since the crisis.

January 2014
A piece of Dodd-Frank, a ruler who guides loan standards to ensure that borrowers can repay the mortgage.

Mars 2020
Many homeowners who are struggling to pay their mortgage due to COVID-19 they are receiving relief, building on the improvements made to foreclosure prevention programs since the last financial crisis.

Mortgage rates have nearly doubled since the start of the year, sapping demand and prompting some economists to expect year-over-year lower national prices in 2023.

However, the overhaul of the country’s credit system and the overhaul of the financial system to better insulate it from economic shocks make a repeat of 2008 extremely unlikely, say politicians and bankers.

“I think one of the reasons people don’t like the reforms is that they were built brick by brick,” said Tim Mayopoulos, who oversaw mortgage firm Fannie Mae after the crisis and is now an executive at the tech company Blend Labs mortgages. Inc.

Between 2006 and 2014, according to a 2015 estimate by the National Association of Realtors, approximately 9.3 million households were foreclosed, had their homes sold to a lender or sold in a distressed sale. Others have followed loan modification programs aimed at lowering their monthly payments.

Ryan Vaughn was one of them.

He was fired from his job at a home builder as the housing market slowed. He is behind on the mortgage payments. He lost investment property in foreclosure and his credit rating plummeted. He spent more than a year working with his lender to adjust the terms of the mortgage on his family’s home in San Clemente, California.

“I’m like, ‘Should I still mow my lawn? Because I’m probably going to get this house taken out too,” she said.

Mr. Vaughn found his footing as the housing market recovered. He now owns and operates a pool building franchise. In 2016, he and his family of five sold their home for a profit and used the proceeds to save about 20% on their current home.

That home is worth nearly double the $1.6 million he paid six years ago and nearly triple the amount on his mortgage, according to an estimate by Zillow.

“My experiences during the downturn in the housing market created far more stress and financial burden than I could handle,” Vaughn said. “I never want to put myself in that position again.”

The financial crisis ushered in a new era of prudent lending. Policy changes resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 helped prevent a return to the old way of doing business. Regulators removed products that allowed lenders to make loans that borrowers could not afford. Adjustable rate mortgages that once attracted stretched borrowers with low interest rates have become conservative loans for people with strong credit.

Many of the products that didn’t require income verification disappeared anyway when subprime lenders went bankrupt, said Amrish Dias, who worked in sales at the now-defunct subprime mortgage company New Century. while the crisis was brewing.

“Everyone’s mindset had to go from ‘OK, I don’t need your W-2s’ to ‘I need everything,'” said Mr. Dias, who is now a loan officer at Cardinal Financial.

Fannie Mae and Freddie Mac,

which packages mortgages into bonds and sells them to investors, came under government control after going bankrupt during the crisis. Their role in the market increased because the effective government guarantee on their bonds meant investors didn’t have to worry about getting burned.

Today, mortgage companies that issue Fannie or Freddie mortgages — about half of all originations — adhere to their strict underwriting guidelines. Fannie and Freddie, for their part, have developed better tools for inspecting loans before they close.

“Today’s borrower is a much better borrower,” said Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute, a Washington, DC think tank. “And the loan is much higher quality.”

Clara Ellis bought a home in Roanoke, Virginia in July for $205,000. She lost a home to foreclosure about a decade ago after falling behind on payments. She’s not worried about being in the same situation again, she said, because she can easily afford her own payments and she plans to stay in the house for a long time.

“I wouldn’t have bought if I didn’t feel financially secure,” she said. “I didn’t jump right away, I waited a few years. I wanted to make sure things were going in the right direction. »

Home prices returned to record highs in the middle of the last decade and have risen as the pandemic has triggered a housing boom in recent years. At the end of June, total mortgage debt was 15% higher than at the end of 2007, but total home equity was 131% higher, according to data from the Urban Institute.

In October, home prices fell 3.2% from June, wiping out $1.7 trillion in home equity, according to Black Knight estimates. Inc.,

a provider of mortgage data and technology.

For many owners, this has wiped out just a few months of capital gains. A 20% drop in home prices would only return prices to their January 2021 level, according to Black Knight.

Those most at risk are those who bought near the top of the housing market last year and earlier this year. Some high-priced markets in the western US, including San Francisco, are starting to show year-over-year price declines, according to brokerage Redfin Corp.

According to Black Knight, about 8% of homebuyer-linked loans this year were at least somewhat submerged in September.

But many buyers in good times put down huge down payments to compete in the booming market. Just 0.96% of all borrowers were under water in October, according to Black Knight, and the share with less than 10% equity in their home is well below pre-pandemic levels.

Admittedly, the housing recovery has been uneven. High-income households reaped 71 percent of housing wealth growth between 2010 and 2020, according to a report from the NAR.

Some people who lost their homes during the housing crisis have become lifelong tenants, and many foreclosed homes in the United States have been bought by investors and turned into rental properties.

Vee Turnage bought her first home in 2003 in Memphis, Tennessee when she was 25 years old.

He had rented an apartment and wanted a house with a garden for his children. The three bedroom house cost $75,000. Mrs Turnage has borrowed the full amount. She planted a rose bush and elephant ears.

Ms Turnage lost her job in the consumer lending department of a bank in 2008 and has been unable to meet mortgage payments and rising home insurance costs. In 2011, she accepted a “cash for the keys” offer from her bank, avoiding a foreclosure by giving the house to the lender for a few thousand dollars.

“It took me about a year to walk that street, because I was heartbroken,” she said.

Mrs. Turnage has been renting in Memphis ever since. She had hoped to buy a home in 2021, but the pandemic has prompted her to keep pooling her savings.

Write to Ben Eisen [email protected] and Nicole Friedman A [email protected]