Prior to the 2008 financial crisis, lenders paid little attention to verifying the income of mortgage applicants.
This contributed to the widespread loan defaults and the growth of "jingle mail," or the practice of walking away from a mortgage by mailing the keys back to the lender.
They now require piles of documentation proving that borrowers can pay back their loans.
Large collections of subpar mortgages were historically retained by banks with no consequence. Such complex debt products barely exist now, and banks would find holding them to be too expensive.
Heavy shields of home equity have replaced underwater mortgages, particularly in the wake of a recent price spike.
A 28% drop in housing prices in the U.S. between 2006 and 2009 caused the value of 11 million homes to fall below their mortgage obligations, leading to a wave of defaults. The financial system came dangerously close to collapsing and a severe recession ensued.
Read also: Here's Where Morgan Stanley Bets The Housing Market Goes In 2023
"While it's impossible to predict the future, concerns about a housing crash are exaggerated. While many markets will see price decreases, we don't see another 2008 crash repeating." said Ryan Frazier, CEO of Arrived Homes. "Current homeowners should be able to service their debt without issue given the tighter credit requirements, unlike in 2008 when there was a significant increase in supply from homeowners unable to service their debt."
Arrived Homes is one of the most active buyers of single-family homes in today's market. The company securitized single-family rentals to allow individuals to purchase shares of investment properties with as little as $100.
According to a CoreLogic analysis, home prices would need to drop between 40% and 45% from their high to put the same percentage of mortgaged homes underwater today.
Since the beginning of the year, mortgage rates have nearly doubled, stifling demand and leading some economists to call for home values to be reduced by as much as 20% in 2023.
However, policymakers and bankers agree that a repeat of 2008 is extremely improbable given the redesign of the country's lending infrastructure and reform of the financial system intended to better protect it from economic shocks.
“I think one of the reasons people don’t appreciate the reforms is that they were built brick by brick,” said Tim Mayopoulos, who oversaw Fannie Mae in the wake of the crisis and is now an executive at the mortgage-technology firm Blend Labs.
According to a 2015 estimate from the National Association of Realtors, 9.3 million homeowners lost their homes to foreclosure, surrendered them to a lender, or sold them in a distressed sale between 2006 and 2014. Others participated in loan modification plans designed to lower their monthly payments.
A new era of prudent borrowing was ushered in by the financial crisis.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 led to improvements in policy that helped prevent a reversion to the previous system of conducting business.
Products that permitted lenders to make loans that borrowers couldn't afford were banned by regulators. Previously tempting stretched borrowers with low teaser rates, adjustable-rate mortgages have evolved into cautious loans for consumers with good credit.
When subprime lenders failed, many of the products that didn't require income verification also vanished, according to Amrish Dias, a sales representative at the now-defunct New Century Financial Corp. at the time the crisis was developing.
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