MReport June 2020

TheMReport — News and strategies for the evolving mortgage marketplace.

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34 | M R EP O RT FEATURE B eginning around 2007, the U.S. faced a nearly unprecedented economic downturn—certainly one like we had never seen before in the new millennium. Over 8 million jobs were lost, millions of homes went into foreclosure, and banks once seen as invincible shut their doors for good. This financial crisis highlighted many areas of the industry that were due for change. Today, the longstanding impacts of that recession can still be seen in our economy in both the processes we put in place and some new seg- ments of the market that emerged as a result. Over a decade later, lessons learned during the Great Recession remain relevant to the housing in- dustry. As another recession looms over both our country and the globe as a result of the COVID-19 pandemic, it is important to look back at the previous recession, un- derstand both common and unique factors compared to the situation today, and consider how we can minimize harm and promote recovery this time around. Factors That Contributed to Severity W hen looking back, the first aspect of the last recession to consider is what drove its sever- ity. The most recent recession the U.S. experienced, beginning around 2007, was especially severe for a number of reasons, primarily large job losses, a concurrent financial crisis, and a large number of home foreclosures. The last recession saw job losses on a far greater scale than previ- ous recessions the country had seen. Between November 2007 and November 2009, employment fell by 5.9%—almost four times the job losses that resulted from the recession in 2001. Those lost jobs impacted countless families and weakened consumer spend- ing considerably. In the housing market, specifically, many people decided to delay starting families, which in turn household formation, a crucial source of demand in the housing market. Others chose to rent for prolonged periods of time instead of buying their own homes, ultimately decreasing the home- ownership rate. The concurrent financial crisis also played a large role in the sever- ity of the last recession. A large number of financial institutions went bankrupt during that time, including large institutions such as Bear Stearns, Lehman Brothers, and AIG. Financial institutions play a major role in financing business and consumer spending, includ- ing housing. The financial crisis reduced credit availability to both households and businesses, mean- ing that investment pulled back more during the last recession than in prior recessions. The last recession also saw a significant increase in foreclosures, which were incredibly damaging to the functioning of the housing market. Foreclosed homes often sell at a deep discount to normal home sales. As a result, markets like California, Nevada, Arizona, and Florida, where foreclosures repre- sented a large amount of homes for sale saw huge home price decreas- es. Lower home prices mean that homeowners, who accounted for around two-thirds of households at that time, experienced a sharp decrease in wealth. This decrease in wealth made them even less willing to spend on discretionary items, dealing a heavy blow to the industries that served the affected consumers. The large number of foreclosures also delayed the recov- ery in new construction, which decreased sharply throughout the recession and did not resume growing until 2012. What the Industry Did to Help T here were significant regula- tory changes following the last recession. The goal was to identify gaps in the way the hous- ing market was set up and practices that contributed to the crisis, ensur- ing that they are not repeated in the future. While it is not always possible to avoid a recession, these changes will likely lessen a reces- sion's severity and its impact on the housing industry, homeowners, and borrowers. Two things the industry has done over the past decade in re- sponse to the recession are: 1) better capitalizing the financial sector; and 2) improving lending standards. Both of these things were imple- mented in hopes of preventing another economic meltdown on the scale we witnessed during the Great Recession. In the private mortgage in- surance (PMI) industry, the government-sponsored enterprises' (GSE) Private Mortgage Insurance Eligibility Requirements (PMIERs) created a prescriptive, risk-based framework of liquid assets to be held against insured loans, as well as operational requirements for mortgage insurance underwriting and quality control processes. This framework was created to protect institutions from suffering the losses they did during and after 2007. At the end of 2019, the mortgage insurance companies belonging to the trade group USMI collectively had minimum required assets of $11.2 billion and available assets of $15.4 billion, for a sufficiency ratio of 136.5%. Having more capital Lessons Learned From the Great Recession How looking back at the last recession can help the housing and mortgage industries to be better prepared moving forward. By Tian Liu

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