MBA advocates new intervention policies for mortgage defaults
The Mortgage Bankers Association is calling on the mortgage industry to develop new intervention policies to better support distressed borrowers.
In a new report, MBA’s Research Institute for Housing America (RIHA) urged lenders and policymakers to develop innovative intervention strategies in light of lessons learned from recent economic crises.
“The mortgage industry has faced numerous challenges that have caused mass upheaval in the housing market, and, in many cases, the industry was ill-prepared to handle the significant influx of mortgage defaults and subsequent foreclosures,” said former senior Federal Reserve advisor Joseph Tracy. “The industry must continue to evolve with the changing dynamics of its customers and their needs. By examining current mortgage design and underwriting standards, the industry will be better equipped to assist distressed borrowers facing hardships.”
The report outlined the need to create a more resilient mortgage finance system. It identified three main types of mortgage defaults: strategic defaults, where borrowers choose to stop payments despite being able to pay; double-trigger defaults, where negative equity and financial hardship coincide; and cash-flow defaults, where borrowers face financial difficulties but could sell their homes if needed.
This classification challenges the one-size-fits-all approach that has long dominated the industry’s response to troubled loans.
“The study’s findings can help the industry identify current issues impacting overall housing sustainability and how to prep for future housing downturns,” said Edward Seiler, executive director of Research Institute for Housing America, and MBA’s associate vice president of housing economics. “Creating solutions for distressed borrowers will greatly improve the efficiency in the housing market as well as provide additional ways to make sure distressed borrowers stay in their homes.”
The report stressed that intervention policies should aim not just to prevent foreclosures but to reduce the financial losses associated with defaulted loans.
Key strategies include mitigating cash-flow constraints through temporary payment reductions or deferrals, as well as deleveraging borrowers by reducing principal balances in specific circumstances.
Read next: Are mortgage servicers’ improvements enough to offset market challenges?
The MBA’s call to action extends beyond individual lenders, suggesting that the entire mortgage ecosystem - including regulators, investors, and technology providers - must collaborate to implement these new approaches.
The report’s authors emphasized that the goal is not just to weather the next storm but to fundamentally transform the relationship between lenders and borrowers.
“Refocusing on sustainability will ensure that future gains in the homeownership rate are enduring and that households are more likely to attain their aspiration of one day owning their home debt-free,” Tracy said.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
