What Happens With Mortgages if There’s a Recession?

Published by Real Estate News | December 18, 2023

Even if the hoped-for economic “soft landing” isn’t so soft, don’t expect to see a wave of short sales and foreclosures this year.

Though mortgage rate relief appears to be on the horizon, it’s still anyone’s guess which direction the housing market will go in 2024.

The threat of a recession still looms in the background — as it has for at least the last year — which could hinder hopes for an economic “soft landing” and a revival for the real estate market. Would a recession bring a tidal wave of short sales? What options do homeowners have if they find themselves unable to make their mortgage payments? Are 40-year mortgages a thing now?

Here’s why the housing market is well prepared to roll with the punches. 

The positives of homeowners with less negative equity

Even if joblessness rises in the next couple of quarters, homeowners hold a tremendous amount of equity in their properties, Rick Sharga, founder & CEO of CJ Patrick Company, told Real Estate News — meaning a spike in short sales is unlikely.

“Short sales will be few and far between because there’s $31 trillion in homeowner equity out there,” he said. “So the overwhelming majority of people have more equity than what they owe on their properties.”

It’s just one of the main differences between the current economic tepidity and the years following the financial crisis of 2008, Ward Morrison, president and CEO of Motto Mortgage said. During the Great Recession, many people had to result to short sales because they had negative equity in their homes. And while foreclosures were widespread at that time, they’re not necessarily the best tool for either homeowners or mortgage providers, he explained.

“Lenders understand that foreclosure in a lot of states is a very complex process and that it’s sometimes better to work with the consumer to figure out a new plan,” he said, while acknowledging the one silver lining to underwater properties hitting the market: “If a lot of people start selling their homes because they’ve come across difficult times but have equity, that’s going to create inventory, which is good for the market.”

When the struggle is real, lenders have more tools to help

While the post-financial crisis years were marked by a surge in foreclosures and short sales, the government and lenders are prepared to act more quickly to help struggling homeowners today. Pandemic-era forbearance plans helped many borrowers survive a difficult period, and similar tools could be used during future economic downturns. 

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