The pandemic housing boom is over. The bust will look nothing like the last one.
Before the financial crisis of 2008, lenders barely bothered to verify mortgage applicants' income. Today they demand reams of evidence that borrowers can afford their loans.
Banks once held big pools of shoddy mortgages with little consequence. Now such exotic debt securities hardly exist, and banks would find them too costly to hold anyway.
Underwater mortgages have given way to hefty cushions of home equity, particularly after a run-up in prices over the past two years.
A 28% decline in U.S. home prices between 2006 and 2009 sent the value of some 11 million homes below their mortgage balances, triggering widespread defaults, a near-collapse of the financial system and a deep recession. Home prices would have to fall between 40% and 45% from their peak to put the same proportion of mortgaged homes underwater today, according to a CoreLogic analysis.
Mortgage rates have just about doubled since the start of the year, sapping demand and prompting some economists to pencil in year-over-year national price declines in 2023.
Yet the redesign of the nation's lending apparatus and overhaul of the financial system meant to insulate it better from economic shocks make a repeat of 2008 exceedingly unlikely, according to policy makers and bankers.
"I think one of the reasons people don't appreciate the reforms is that they were built brick by brick," said Tim Mayopoulos, who oversaw the mortgage company Fannie Mae in the wake of the crisis and is now an executive at the mortgage-technology firm Blend Labs Inc.
Between 2006 and 2014, about 9.3 million households went through foreclosure, gave up their home to a lender or sold in a distressed sale, according to a 2015 estimate from the National Association of Realtors. Others went through loan-modification programs aimed at reducing their monthly payments.
Ryan Vaughn was one of them.
He was laid off from his job at a home builder as the housing market slowed. He fell behind on his mortgage payments. He lost investment properties to foreclosure, and his credit score plunged. He spent over a year working with his lender to modify the terms of the mortgage on his family's San Clemente, Calif., home.
"I'm thinking, 'Should I even mow my lawn anymore? Because I'm probably going to get this house taken from me, too,' " he said.
Mr. Vaughn found his footing as the housing market recovered. He now owns and operates a swimming pool construction franchise. In 2016, he and his family of five sold their house at a profit and used the proceeds to put roughly 20% down on their current home.
That home is worth nearly double the $1.6 million he paid for it six years ago and almost triple the amount of his mortgage, according to a Zillow estimate.
"The experiences that I had during the downturn of the real-estate market created way more stress and financial burden than I was able to handle," Mr. Vaughn said. "I just never want to put myself in that position again."
The financial crisis ushered in a new era of borrowing prudence. Policy changes stemming 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 did away with products that allowed lenders to make loans borrowers couldn't afford. Adjustable-rate mortgages that once enticed stretched borrowers with low teaser rates became conservative loans for people with strong credit.
Many of the products that didn't require income verification disappeared anyway when subprime lenders went belly-up, said Amrish Dias, who worked in sales at the now-defunct subprime mortgage company New Century Financial Corp. as the crisis was brewing.
"Everybody's mind-set had to move 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 package mortgages into bonds and sell them to investors, came under government control after failing during the crisis. Their role in the marketplace grew because the effective government guarantee on their bonds meant investors didn't have to worry about getting burned.
Today, mortgage companies issuing Fannie or Freddie mortgages--about half of all originations--adhere to their tight underwriting guidelines. Fannie and Freddie, for their part, developed better tools for inspecting loans before they close.
"Today's borrower is a much higher quality borrower," said Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute, a Washington, D.C., think tank. "And the loan is a much higher quality loan."
Clara Ellis bought a house in Roanoke, Va., in July for $205,000. She lost a house to foreclosure about a decade ago after falling behind on payments. She isn't worried about being in the same position again, she said, because she can comfortably afford her payments and plans to stay in the home a long time.
"I would not have bought if I didn't feel financially secure," she said. "I didn't jump into this quickly, I waited a couple of 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 they surged as the pandemic unleashed a housing boom over the past few years. At the end of June, total mortgage debt was 15% higher than it was at the end of 2007, but total home equity was 131% higher, according to Urban Institute data.
As of October, home prices were down 3.2% from June, erasing $1.7 trillion of home equity, according to estimates by Black Knight Inc., a mortgage-data and technology provider.
For many homeowners, that only erased a few months' of equity gains. A 20% home-price drop would only bring prices back to where they stood in January 2021, according to Black Knight.
The people most at risk are those who bought near the peak of the housing market last year and early this year. Some high-price western U.S. markets, including San Francisco, are starting to post year-over-year price declines, according to the brokerage Redfin Corp.
Roughly 8% of loans tied to this year's home buyers were at least a little bit underwater in September, according to Black Knight.
But many boom-time buyers made large down payments to compete in the hot market. Just 0.96% of all borrowers were underwater in October, and the share with less than 10% equity in their homes is well below prepandemic levels, according to Black Knight.
To be sure, the housing recovery was uneven. High-income households collected 71% of the growth in housing wealth between 2010 and 2020, according to a report by NAR.
Some people who lost their homes during the housing crisis became lifelong renters, and many foreclosed homes around the U.S. were bought by investors and turned into rental properties.
Vee Turnage bought her first house in 2003 in Memphis, Tenn., when she was 25.
She had been renting an apartment, and she wanted a home with a backyard for her children. The three-bedroom house cost $75,000. Ms. Turnage borrowed the full amount. She planted a rose bush and elephant ears.
Ms. Turnage lost her job in the consumer-loan department of a bank in 2008, and was unable to keep up with mortgage payments and rising home-insurance costs. In 2011, she accepted a "cash for keys" offer from her bank, avoiding a foreclosure by giving the lender the house in exchange for a few thousand dollars.
"It took me about a year to actually even ride down that street, because I was kind of heartbroken," she said.
Ms. Turnage has rented in Memphis ever since. She hoped to buy a house in 2021, but the pandemic prompted her to keep building up her savings, instead.
