Trump officials should maintain steps to reduce foreclosures

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While housing affordability challenges rightly dominate current headlines, recent improvements in loss-mitigation processes for federal mortgage programs have been an unmitigated success for distressed homeowners as well as taxpayers, notwithstanding comments made in a recent op-ed.  

The economic impacts of the Great Recession showed that foreclosures have devastating consequences for the homeowner, with additional negative effects on their lender, mortgage guarantor, neighbors, and community. In response, mortgage stakeholders, including government housing agencies and the mortgage industry, developed cost-effective loss mitigation tools to prevent unnecessary foreclosures and reduce foreclosure-related losses for all stakeholders, including taxpayers. 

Loss mitigation pays for itself and is a win-win: mortgage lenders and government agencies mitigate their losses, and the borrower gets to keep their home. Abandoning these tools now would be a severe policy mistake. 

For example, Fannie Mae and Freddie Mac introduced the payment deferral in 2020, as a low-cost option to allow delinquent mortgage borrowers to resolve their delinquency by moving their missed payments to the back of the loan and resume making their original monthly payment. The borrower still is responsible for making the missed payments, only the timing is changed. Since its introduction, nearly three-quarters of GSE borrowers who have completed a loan workout have used the payment deferral. 

The FHA Payment Supplement announced about a year ago will help more than 250,000 borrowers stay in their homes and avoid foreclosure. The Payment Supplement also protects the US government and taxpayers by reducing claims on the FHA's Mutual Mortgage Insurance Fund. Similarly, the VA Servicing Purchase program announced in April 2024 will save tens of thousands of active-duty military personnel and Veterans from losing their homes to foreclosure. 

Eliminating loss mitigation now would lead to more foreclosures, with dramatic individual and societal costs. According to a 2010 HUD study, the average foreclosure costs society $71,000 (in 2010 dollars) and all stakeholders share the burden: the homeowner loses $10,300 in moving costs, legal fees, and other charges, the lender (or mortgage guarantor) loses $13,000 in transaction costs and another $13,000 in house price depreciation, neighboring properties depreciate by $14,500, and the local government loses up to $20,000. Today, after accounting for inflation, the loss from foreclosure is likely to be substantially higher. 

Foreclosure also creates a cascade of devastating economic effects on the former homeowner. A 2020 study found that foreclosed-upon homeowners are 20 percentage points less likely to become future homeowners. They move more frequently, often to lower-income neighborhoods with schools with lower test scores, and have more unpaid debt collections and higher bankruptcy rates.

The credit scores of borrowers who lost their home to foreclosure in 2008 took, on average, over 8 years to recover and, 16 years later, remained about 40 points behind borrowers who were similarly credit-worthy in 2006 but never experienced foreclosure in that period.

Preventing avoidable foreclosures also benefits underserved communities. Black and Latino homeowners are twice as likely as white homeowners to experience a distressed sale and live in neighborhoods where distressed sales carry larger discounts, which substantially lower housing returns and account for 37% of these households' lower projected wealth at retirement age.

Critics of loss mitigation often talk about the moral hazard of borrowers who might try to game the system, but these unsupported claims do not stand up to scrutiny. A Federal Reserve Bank of Cleveland study that looked at three likely ways a homeowner might try to engage in "strategic behavior" to unfairly gain a payment reduction showed little evidence of borrowers using recent mortgage forbearance provided during the COVID crisis to gain unwarranted reduction of their mortgage payments. 

Similarly, an analysis of bank account data and COVID-related forbearance found little evidence of widespread moral hazard. Ten years ago, concerns about strategic default—walking away from a mortgage because the loan balance was greater than house value—were paramount, but recent research shows no evidence of widespread strategic default.

Today, the rules for loss mitigation are stricter than during the pandemic because missed payments now must be reported to the credit bureaus, so there is a strong disincentive for a mortgage borrower not experiencing actual financial hardship to purposely miss mortgage payments to try to gain a payment reduction through forbearance. The long-term severe negative consequences on a borrower's credit score and ability to get credit in the future make such an effort unlikely. 

The cost of providing loss mitigation is substantially lower than the cost of foreclosure. The cost savings alone provide sufficient support for loss mitigation programs. Add the avoidance of the additional negative consequences of foreclosure and the conclusion is clear: loss mitigation is a critical part of a strong and sustainable housing finance system.