Closing the gap for American homeowners facing hardship

In early 2009, as the economic team at the White House was mapping recovery efforts, there was no complete way of knowing the full impact of the Great Recession in real time. As deputy director of the National Economic Council at the time, I can attest that one of the biggest challenges in developing the appropriate response was that we simply didn’t have accurate and timely data about the shifting economic landscape.

We knew we had to act quickly and aggressively to stall an even greater economic collapse, especially as it related to the housing market. Owning a home is a vital part of the American dream and the prevailing path for families to build wealth. Yet this dream was suddenly at risk for millions of families who faced a sudden loss of income due to the recession. The problem was further compounded by a steep decline in home prices that left many borrowers “underwater” on their mortgage.

{mosads}As these families struggled to make their mortgage payments, a debate raged within the policy community about what type of policy prescription would work best to provide relief: a program that immediately reduced the monthly mortgage payments for homeowners facing a hardship, or a program that reduced the overall debt burden by forgiving the principal owed on underwater mortgages.

Many who supported principal reduction also believed that the subsequent increase in housing wealth would spur consumption, without addressing the fact that principal reduction that leaves borrowers still underwater is hard to monetize. For example, an underwater borrower cannot take advantage of a cash-out refinancing or a home equity loan.

In 2009, there were heated debates about how to best to help American families stay in their homes, avoid further mortgage defaults and get their finances back in order. However, a primary challenge in identifying the best path forward was that we lacked real-time data to understand exactly how each of these policy prescriptions would play out. When we launched the JPMorgan Chase Institute in 2015, our mission was very much forged from my experience at the White House. Having reliable, high-frequency, and more timely data at our disposal would help future policymakers better tackle major economic challenges.

As part of America’s largest bank, we have unparalleled access to big data, and we set out to leverage that information to tackle significant economic questions with the goal of helping policymakers, industry leaders, and nonprofit leaders make improved data-driven decisions. One of the issues we wanted to tackle at the Institute was to better understand the conditions that led to a mortgage default, and to find clearer evidence about the most effective elements of mortgage modifications to help consumers in the future.

To get to the root of this issue, we examined the account data from more than 450,000 de-identified Chase mortgage customers who received a mortgage modification, including some who received assistance through various modification programs, between July 2009 and June 2015. We found payment reduction was far more effective than principal reduction at helping borrowers avoid default. In fact, a 10 percent reduction in monthly mortgage payments reduced default rates by 22 percent. Substantial payment reductions were more effective at reducing defaults than payment reductions designed to reach a predetermined affordability target, such as a debt-to-income ratio.

In contrast, reducing the amount of principal owed on underwater mortgages had no tangible impact on default rates. Because principal reduction didn’t reduce default rates for underwater borrowers, we can conclude that “strategic default,” a boogeyman often cited during the housing policy debate, was simply not a primary driver of default decisions for the homeowners we studied. Our analysis showed a reduction in the housing debt of underwater borrowers had no impact on consumption, meaning the housing wealth effect and one of the primary stimulus vehicles for monetary policy, simply didn’t exist for the underwater borrowers.

Finally, we found that on average, a mortgage default was preceded by a sudden and drastic reduction in income, regardless of the homeowner’s debt-to-income ratio or home equity. This suggests a loss in income, not a high payment burden or negative home equity, was a primary driver of default. As we have demonstrated in other research on households, because most household do not hold enough of a cash buffer to withstand even typical changes in income, major income shocks such as those many faced during the crisis can all too easily lead to defaults.

These findings may seem to make sense now, but in 2009, these were very real policy debates about this issue. The stakes were incredibly high, both for our economy and for millions of families. The lessons we learned from this research are more than a retrospective evaluation of past policies. Rather, they present a clearer path forward helping homeowners facing a financial hardship remain in their homes.

This year alone, untold numbers of Americans in Texas, Florida and Puerto Rico saw their homes damaged in Hurricanes Harvey, Irma and Maria. Local economies temporarily slowed, and in the case of Puerto Rico were devastated, reducing income for employees and business owners alike across the affected areas.

Going forward, we will invariably find ourselves in situations where homeowners need help, whether that need stems from a natural disaster or an economic downturn. The question, then, is how do we most effectively help those who are struggling financially? As policymakers, interest groups, homeowners and the mortgage industry consider these issues in the future, we hope the availability of better data can offer clear, realtime information and insights with which to make more informed decisions.

Diana Farrell is president and CEO of the JPMorgan Chase Institute.