Mortgage modifications that helped borrowers keep their homes during the Great Recession were designed for short-term relief, but they had extraordinary long-term effects on wealth.
A new study from Fernando Ferreira, who chairs the real estate department at Wharton, finds that 85% of distressed borrowers who got modifications such as forbearance or interest rate reductions were still in their homes by 2013, compared with 49% of borrowers who didn’t receive modifications.
By 2022, more than a decade after the subprime mortgage scheme triggered a global financial collapse, assisted borrowers were still 19% more likely to be homeowners. And they had accumulated an average of $83,000 more in capital gains wealth.
“That’s more than a whole year of wages for a lot of people,” Ferreira said. “Not losing their house at the lowest point in price, which is when the market collapsed, was very beneficial for families because the prices increased so much that they built up a lot of wealth.”
The study, “Does Homeownership Matter? The Long-term Consequences of Losing a House During the Great Recession,” was published by the National Bureau of Economic Research. Co-authors are Heidi Artigue, doctoral candidate in applied economics at Wharton; Patrick Bayer, economics professor at Duke University; and Stephen Ross, economics professor at the University of Connecticut.
The answer to the question posited by the scholars in their paper title is a resounding yes, Ferreira said.
“The headline is that homeownership matters for housing wealth,” he said. “If you look at the recent past, it’s incredibly valuable for building up wealth. You can do anything that you want with that. You have options, especially upon retirement.”
“The headline is that homeownership matters for housing wealth.”— Fernando Ferreira
Housing Affordability Is a Hot-Button Issue
The study is the first to estimate the long-term financial effect of homeownership in the U.S. Ferreira said the team wanted to study the topic because housing is such a critical economic and social issue, which also makes it a political issue. For Americans, owning a home has long been considered a pathway to individual wealth accumulation, and the government has spent billions to subsidize homeowners.
“Our goal was not to try to reform the system. It was a simpler goal of saying that we understand homeownership is important, so let’s try to causally estimate that. What are the outcomes that we can measure?” Ferreira said.
The team obtained detailed financial data on more than 375,000 borrowers, then focused on those in the sample set who were more than 90 days behind on their mortgage in 2010. Delinquent borrowers represented about 18% of the set. Then they tracked those borrowers over time using credit reports.
In addition to the significant gap in home retention and accumulated wealth, the study also found an interesting sidenote on home equity lines of credit (HELOC). These loans, which allow homeowners to borrow against their equity, decreased dramatically in the years following the Great Recession as lenders tightened controls. Although HELOC rates began to rebound by 2014, they still remain below pre-recession levels. It’s an important point for the study, Ferreira said, because the lack of access to HELOCs likely affected consumer consumption.
“In the past, people used to consider their homes as ATM machines by borrowing and using the house as a collateral. That stopped after the Great Recession, but it could return at some point if credit constraints ease,” he said. “Because it has not, we don’t see people using that extra housing wealth for consumption purposes in the short term.”
“People used to consider their homes as ATM machines by borrowing and using the house as a collateral.”— Fernando Ferreira
How Homeownership Affects Consumption and Creditworthiness
The study is also notable for what it didn’t find. The data revealed that retaining homeownership had little effect on consumption, creditworthiness, or neighborhood quality. To measure consumption, the scholars looked at credit card and auto loan activity before and after the recession. And to measure creditworthiness, they looked at credit scores from 2004 to 2022. There were no divergent patterns between distressed borrowers who received mortgage modifications and those who did not; both groups rode the same wave as the economy cratered then recovered.
The scholars then turned their attention to housing mobility and neighborhood quality. Homeowners who lost their residences were twice as likely to change ZIP codes following the recession as they became renters. But moving into rentals didn’t mean they compromised on quality. They still lived in neighborhoods that were comparable in terms of income distribution. The abundance of rental housing following the crash may be the reason, according to the authors.
“People confuse homeownership with a good neighborhood. That’s not necessarily true, especially if you are young,” Ferreira said, noting that renters often find smaller units in better neighborhoods where they can’t afford to buy. “Homeownership is everywhere, in poor neighborhoods and in rich neighborhoods.”
Implications for Policy
The professor said the study was not meant to make a political statement. The scholars wanted to focus on the risks and rewards of homeownership. But the results have policy implications, nonetheless. It shows that government intervention in the form of mortgage modifications helped homeowners stay in place, which helped them accumulate more housing wealth over time.
“If you can’t keep your house, it adds to the negative labor market shock. So, being able to tap into those modifications is important,” Ferreira said.
Still, he acknowledges that homeownership isn’t for everyone. Homes are the largest purchase that most people will make in their lives, and there are many considerations beyond cost.
“Homeownership is risky. You don’t know if the value will go up or decline. You may have a negative income shock. For some people, it does not make sense,” Ferreira said. “What we show in the paper is another perspective in this comprehensive view of homeownership.”
