CHN Blog

A mortgage program may not be the best medicine for this recession

Uncle Sam has already pumped a lot of money into the economy during the past several weeks. Do we need more to help out-of-work homeowners with their mortgages?

Uncle Sam helped hard-hit homeowners a decade ago with their mortgage payments. So will a federally funded mortgage-assistance program return, helping homeowners during the current recession? 

Not likely. Things are much different — and fundamentally better — today with the current coronavirus-prompted recession compared to the Great Recession that started in 2007. (Please remember, “better” is a relative term.)  

When the Obama administration established the Hardest Hit Fund in 2010, the Great Recession had already caused a far-reaching housing crisis, with a dramatic decline in prices, leading to many homeowners grappling with underwater mortgages and prompting millions of foreclosures. The hard-to-believe idea of homeowners tossing (or mailing) the keys to their lenders was very much a reality. 

The American dream had become a real-life nightmare. And California was the epicenter, with about 1.1 million homeowners enduring a foreclosure during the Great Recession, the equivalent of everyone in San Jose, the third-largest city in the state. Stockton, Elk Grove, Riverside and many other cities had double-digit foreclosure rates.

Lenders foreclosed on 1.1 million homes in California during the Great Recession. Jeff Turner/Flickr

The Treasury Department’s Hardest Hit Fund was established to help. It allocated about $2.3 billion to assist financially strapped homeowners in California with their mortgages, from making the monthly payments while they look for work to helping them get right-side-up with an underwater mortgage. Keep Your Home California helped 85,000 homeowners between 2011 and 2018, when the program essentially ended.

Billions and billions

Fast-forward to spring 2020 and the Great Recession’s grim numbers look almost good compared to the past few months with the coronavirus pandemic. Just a couple of figures to consider:

  • About 2.3 million Californians were without work during the peak of the Great Recession, compared to the more than 3.4 million Californians who have filed for unemployment benefits since the governor issued the shelter-in-place order in mid-March, according to the state Employment Development Department. Those furloughed and laid-off employees are almost the equivalent of everyone living in San Diego, San Jose and San Francisco, combined.
  • Nationwide, more than 3.5 million homeowners with mortgages have asked to be put into forbearance plans with their servicer since mid-March, according to the Mortgage Bankers Association. The MBA does not have state-specific figures. But if Californians were only 5% of the forbearance requests — about 175,000 homeowners — it would take a massive federal program to help with the mortgage payments. How massive? At least $1.05 billion just to cover mortgage payments for three months, based on an average payment of $2,000 per month. By the end of 2020, the assistance would easily exceed Keep Your Home California’s total funding, which again lasted more than seven years. 

In short, the coronavirus pandemic-prompted recession has created a much-deeper and faster pain than the Great Recession. But the economic downturn, and hopefully the layoffs, are likely short-lived, say several well-respected economists.

Again, an awful, deadly and fast-moving disease caused the current recession, dramatically different from the Great Recession, when a long list of problems — including greed and manipulation — rocked economies worldwide.

Some hard lessons were learned during the Great Recession, especially with foreclosures, an often lengthy process that hurts homeowners, lenders and communities. (Case in point: the city of Stockton filing for bankruptcy.) 

Stockton filed for bankruptcy in 2012, in part because of foreclosures.

Fortunately, banks, credit unions and the federal housing agency overseeing Fannie Mae and Freddie Mac were quick to announce that coronavirus-affected homeowners could delay their mortgage payments from three to 12 months. Forbearance gives homeowners some breathing room, at least for now, and the federal government some time to figure out how — or if — to help lenders and their investors.

‘Things should largely return to normal faster than many expect’

Today’s economy is much different than the Great Recession, which was prompted by the subprime mortgage meltdown that caused the collapse from Wall Street to almost every street in the U.S. 

The COVID-19 pandemic will continue to cause deep and much economic pain, along with the health woes, but a fast recovery is more likely than during the Great Recession, the longest-lasting — and worst — recession since the Great Depression. Better days could be a few months away.

“Not all of the damage will be erased, but much of it will and things should largely return to normal faster than many expect,” says Christopher Thornberg, Founding Partner of Beacon Economics.

Which counties are most at risk for a housing collapse due to COVID-19?

COVID-19 has had a huge impact on California, from many residents hunkering down at home to millions out of work. 

Despite the current challenges, and there are many, the coronavirus and shelter-in-place order will cause little long-term damage to the housing market — and homeowners — in the state, according to an ATTOM Data Solutions report. States in the Northeast, especially New Jersey, face a much greater risk of a pandemic-prompted housing market crisis than those in the West, especially in California.

But there are a handful of counties in the state where housing could suffer. 

Homeowners in Shasta County (Redding) face the highest risk in California. Shasta is the only county to crack the nation’s top 50 counties most vulnerable from a COVID-19 housing meltdown. 

Shasta County homeowners face the greatest risk for a housing crisis prompted by COVID-19. Nadel Photography/Shutterstock

ATTOM Data determined the most at-risk counties based on the percentage of housing units receiving a foreclosure notice during the fourth quarter, the percentage of underwater mortgages — loan-to-value ratios of 100% or greater — and wages required to pay for homeownership costs, from mortgage payments to property taxes.

Shasta County is one of the most affordable counties in the state with a median property value of $233,500, but household income is only $47,300 — much lower than the statewide average. And almost one of every five residents in the county lives in poverty, according to the U.S. Census Bureau.

The rest of the state’s housing markets are in a much better position, with only Madera and Riverside counties — Nos. 60 and 61 nationwide, respectively — a minor worry.

However, one county to keep a close eye on is Kern County (Bakersfield), listed at No. 79 in the national ranking.  The county has been struggling for the past several years, as crude oil prices have declined — and eventually plummeted in recent weeks. Oil is a major employer in Kern County, and layoffs in the oil patch have a ripple effect in the region.

A walk-friendly neighborhood is nice but, for many, not worth the price

Many Californians enjoy living near and walking to schools, parks, shopping centers and other services, but that doesn’t always add up to a price premium when it comes time to sell — a bit of an anomaly compared to national figures.

Nationwide, being close to schools or shopping centers adds almost 24% — or $78,000 — to the sales price, according to a Redfin report. That’s a nifty premium for consumers dreaming of dropping off their kids at school or walking a few blocks for bread, eggs and milk, but it’s down slightly compared to previous years.

The California dream, like some other states, is more about being able to afford to buy a house, rather than looking for nearby schools and stores. 

“Properties that are more affordable are seeing the most demand and price growth right now, and homes in less walkable neighborhoods often fall into this category,” says Redfin chief economist Daryl Fairweather. “There just aren’t as many people who can afford walkable neighborhoods. Many house-hunters are also willing to move to less walkable neighborhoods in order to get single-family homes.”

Redfin chief economist Daryl Fairweather

California is an excellent example where affordability edges out walkability, at least for most buyers.

In California, only Riverside beat the national average. Homes in walkable communities in Riverside garnered a 30% price increase (almost $11,400) compared to those in car-dependent neighborhoods. Of course, walkable communities in Riverside are difficult to find. The city’s walkable score is 42, the second-lowest on the national list.

San Diego had the second-highest “walkable” premium at 10.5%% in California, with a $60,225 premium. But many of the walk-friendly neighborhoods are near beaches, which already have higher prices.

Los Angeles-area residents love their cars (though not so much the traffic that comes with them) and aren’t willing to pay more for a walk to the park. Homes in walkable neighborhoods in Los Angeles sell for only 5.8% more than those in car-dependent areas.

However, in defense of Los Angeles, the city can often be as hard to navigate by foot as behind the wheel with busy streets and some not-so-friendly residents.

The same can be said for Oakland, the only city on the national list where a walkable neighborhood is actually detrimental to the bottom line, with a negative 1.3% — or $9,500. Living near a school, shopping center or park is not a strong selling point.  

San Francisco, the second-most-walkable community in the U.S. with a score of 87 (behind only New York City), was not researched since most homes are deemed walkable, albeit often up against some steep hills.

What is a walkable city? Cities where daily errands do not require a car score 90 points and above, a score of 70-89 points means most errands can be accomplished on foot and a score of 50-69 indicates that some errands can be completed on foot.

Walkable scores for cities in California:
  1. San Francisco: 87
  2. Long Beach: 72
  3. Los Angeles: 68
  4. Anaheim: 55
  5. San Diego: 51
  6. San Jose: 49
  7. Sacramento: 45
  8. Fresno: 45
  9. Stockton: 43
  10. Irvine: 43
  11. Riverside: 42
  12. Bakersfield: 34  
Long Beach is the second most walkable city in California, behind San Francisco. Trekandshoot/Shutterstock

Blame Obama or Trump for sky-high rent? Neither, really

San Francisco and Riverside had the third- and fifth-largest rent increases for one-bedroom apartments during the past seven years, the latest evidence of the high cost of living in California — and the real-life struggle of saving money to purchase a home.

The median rent for a one-bedroom apartment in San Francisco jumped 62.7% between 2012 and 2019, behind only first-place Phoenix (77.3%) and Atlanta (72.7%) during that seven-year span, according to PropertyClub.

Riverside’s one-bedroom rent increased 60.9% over those seven years, just behind Tampa, Fla., at 62.6%. 

The impressive gains are good for property owners but painful for renters, especially those scrimping to save for a down payment for a house.

President Obama

PropertyClub crunched data to determine when much of those gains happened per market — under President Trump or President Obama? But applauding or blaming a president for hard-to-fathom rent increases is tough since administration policies have less impact on rents than closer-to-home factors, such as the local economy and job growth.

President Trump

But if you want to play along, PropertyClub determined that three of the four cities surveyed — including Los Angeles and San Diego — had higher rent increases under Obama. Only Riverside rents have soared more under Trump, likely because many families have been priced out of the Los Angeles rental market.

Los Angeles and San Diego rents jumped 57% and 46% between 2012 and 2019, respectively.

Ron Trujillo

Ron Trujillo

Longtime business journalist-turned-communications executive who enjoys reporting on residential real estate in his spare time.