MReport June 2020

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36 | M R EP O RT FEATURE means that the industry is better positioned to withstand losses in a stress scenario, ultimately making the financial system stronger, especially for the next time it faces a downturn. It also means sig- nificant protection for taxpayers, as private capital will be used to meet losses before taxpayer funds. Lending standards also have changed significantly over the last decade. The layering of risky loan features that contributed to much of the negative impact on the hous- ing market such as no or negative amortization, and lack of docu- mentation of income, employment, and assets have largely disappeared in recent years. The average credit score required for a loan is also higher now, meaning that bor- rowers getting the loans typically have a longer and better history of responsibly using credit. Stronger lending standards and more capitalization are two ways that the housing industry has already learned from the past reces- sion and worked to put processes in place to protect the housing system, as well as the consumers it serves, but these are not the only two responses to the crisis. The U.S. also passed regulations, such as the Dodd-Frank Act, which subsequently formed regulatory bodies like the Consumer Financial Protection Bureau. These regula- tions, and countless others, were set in place to create a line of defense to keep such a meltdown from ever happening on the same scale again. The more we reflect on our past economic experiences as a country—both good and bad—the more lessons we will be able to draw upon to create regulations and systems to protect the nation's economy, its citizens and the finan- cial institutions that serve them. Being able to look back and assess how we can learn from mistakes or successes is crucial when we begin walking on the road to recovery. Elements of Recovery L ooking back at the previous recession, it came with a rather slow recovery time. In hopes of a faster recovery from the next reces- sion, it is imperative to understand why the last one took so long. When we came out of the last recession, credit availability stayed tight for too long. As a result, many potential homebuyers were shut out of the housing market for a significant period. That is especially true for first-time homebuyers with limited savings, who have a shorter credit history, but are a critical part of the housing market. In the end, over 3 million poten- tial first-time homebuyers lost the opportunity to become homeown- ers between 2007 and 2015 and the housing industry lost the oppor- tunity to serve these homebuyers. The ripple effects of this missed opportunity stretched far and wide in the housing industry, and its impact is still felt today. Nevertheless, the last recovery also showed the industry's ability to adapt and innovate in a downturn. For example, some investors real- ized that people who lost homes to foreclosure or those who could not buy because of tight credit stan- dards still needed a place to live. This gave rise to investor-owned, single-family rental businesses. Non bank lenders also seized their opportunity when bank lenders began exiting the mortgage market, and these non-bank entities represent a major segment of the mortgage industry today. Because housing is such a fundamental part of people's lives, disruptions within the housing industry will give rise to alternatives to meet these same needs. Ultimately, any disruption in the housing market—or any indus- try, for that matter—tends to lead to innovation. Ultimately, Innovation is Key T his is the biggest lesson to be learned from our past recession and one that should be carried through future ones: we must em- brace change in the middle of un- precedented disruption. Especially now, as both our country and our world are experiencing a unique and unprecedented pandemic, any impending economic impacts be- cause of this also will be unique. It is key to be flexible and to recognize that a severe disruption to the economy and the hous- ing market calls for change. It is key to identify and understand the disruption, and to move to a better solution that allows the industry to better serve homebuy- ers and borrowers. It's clear that unprecedented challenges call for unprecedented solutions. As we figure out what this potential recession looks like and start thinking about how we can help the industry recover, we are best served by building on the innovations that got us out of the last one. Most importantly, we should not be tempted to fall back to the viewpoints and practices that may produce short term gains, but ultimately set up the industry to manage another round of chal- lenges down the road. . TIAN LIU has served as the Chief Economist for Genworth Mortgage Insurance Corporation since 2014. He is responsible for tracking and analysis of U.S. and regional economic conditions. He authors the company's Weekly Economic Report and provides regular updates on housing and mortgage markets. Mr. Liu began covering the U.S. housing market in 2007. His commen- tary on the housing market has appeared in the Wall Street Journal, New York Times, CNBC, Washington Post, and other notable publications. Mr. Liu has a Masters in Economics from the University of Chicago and an under- graduate degree in Economics from the Australian National University. The statements provided are the opinions of Tian Liu and do not reflect the views of Genworth or its management. Over a decade later, lessons learned during the Great Recession remain relevant to the housing industry.

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