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A statement from Joe Scantlebury, President and CEO of Living Cities on Building Liquid Reserves to Strengthen Homeownership for Households of Color, a report by Urban Institute researchers funded by Living Cities
After the 2008 financial crisis, banks, regulators, and policymakers did serious work to rebuild the front door to homeownership. Underwriting changed. Disclosure changed. Entire categories of risky mortgage products changed or disappeared. Crucial innovation reforms bolstered an economy on the brink. Mortgages made today are safer at origination than the loans that helped drive the last housing crisis. [1]
We rebuilt the front door, then left families exposed once they crossed it.
We put people through a great deal to determine whether they can afford to buy a home. Two years of tax returns. Sixty days of bank statements. Explanations for unusual deposits. On some loans, proof that cash reserves will still be standing after closing because the lender wants to know the buyer can absorb a surprise.[2]
Then the buyer signs. From that point forward, our mortgage system largely watches one thing: when and whether the payment arrives. It notices when a homeowner misses one. It does very little to make sure that the homeowner has sufficient financial guardrails that keep those payments coming.
A new report by Urban Institute researchers points to the next challenge in mortgage design: helping homeowners withstand financial shocks before they reach default. [3]
A key issue is liquidity. For a buyer without family wealth behind them, purchasing a modest home can absorb years of savings. The Urban Institute report cites estimates that the cash needed to close on a home can deplete roughly seven years of savings for the median homebuyer. That leaves very little margin for what comes next.[4]
And what comes next is usually not extraordinary.
Hours get cut. A car needs a transmission. A medical bill arrives. Property taxes or insurance raise the monthly payment. A family member dies. Someone has to step away from work to provide care.
Research shows that unexpected expenses are the most common trigger among borrowers who default. Job loss is another major trigger. Illness, disability, and large debt payments also play significant roles. These are not unusual failures of judgment. They are ordinary financial shocks hitting households without enough cash available to absorb them. [5]
The important question for the mortgage industry is not simply whether that is unfair. It is whether we have designed the system intelligently around a risk we already understand.
Consider what happened in Ohio through the Homeowner Assistance Fund—the pandemic-relief program to help vulnerable homeowners. Homeowners there seeking help only with current and future mortgage payments received an average of $5,332, a much lower amount than those funded to overcome an existing delinquency And they had a strong success in staying current. To address a financial shock, that is a relatively small amount of money measured against the value of the mortgage, the cost of foreclosure, or the loss of a home.[6]
So here is a question we need our industry of lenders, servicers, regulators and policymakers to consider:
What is the cost of ensuring a homeowner has access to liquidity compared with the cost of default and foreclosure?
That calculation matters to families. It certainly also matters to financial institutions and lenders. Foreclosure can also affect the broader community by destabilizing neighborhoods, suppressing nearby property values, reducing municipal tax revenue, displacing families, and increasing demand for public services. The Urban research also points to a second-order effect: when lenders perceive borrowers with little wealth as riskier, they become less willing to approve those borrowers in the first place.[7]
A product that reduces the risk of default could therefore do two things at once. It could help more families remain homeowners and potentially make responsible lending to lower-wealth borrowers safer for financial institutions.
We know that temporary payment interventions can work. Research on post-recession programs found that temporary reductions in mortgage payments reduced default. Assistance during periods of unemployment reduced the probability of default over four years by 41 percent. Pandemic-era forbearance provided another large-scale demonstration that giving borrowers time to get through temporary hardship can help them sustain their mortgages over the long term.[8],[9]
The mortgage system has already adapted in response to that evidence.
Fannie Mae and Freddie Mac made expanded forbearance approaches permanent after the pandemic. FHA followed with additional loss-mitigation tools. Housing finance agencies in the states have tested other forms of assistance. Credit unions have experimented with mortgage reserve accounts that set aside funds homeowners can draw on during periods of financial stress.[10]
None of these approaches have perfectly landed on a definitive answer. Mortgage reserve products remain small, operationally complicated, and, in many cases, too new to demonstrate their effects on default risk at scale. Borrowers need to understand and trust these products. Someone has to fund, seed, or match the reserves. Servicers need workable processes. And regulators need to be comfortable with the product design.[11]
The next step is to test what helps families stay financially secure after closing.
After 2008, the mortgage industry showed that it could redesign major parts of the system when the evidence and the stakes demanded it. We should bring that same seriousness to what happens after a family becomes a homeowner.
Access to ownership is not the same thing as durable ownership. For decades, much of housing policy has focused understandably on access. Down payment assistance, underwriting standards, affordable mortgage products, and housing supply all matter. We need those tools. Durable homeownership also requires attention to what happens after closing.
A household that uses nearly all of its available savings to cross the threshold into homeownership may have succeeded according to our current system while becoming extremely vulnerable to the first financial shock on the other side of the door. We designed an elaborate entryway and haven’t checked the rest of the structure.
A design choice, not a law of nature.
The next generation of mortgage design begs a different question: how do we build modest liquidity protection into homeownership itself so that we can assess financial risk before a family reaches crisis?
We do not need to know the final product before we begin testing and refining promising solutions. We need serious demonstrations that test different approaches, identify which borrowers benefit, determine what level of reserve makes a meaningful difference, establish workable funding mechanisms, and measure the effect on both homeowner stability and lender risk. The Urban Institute researchers have given the field a credible starting point.
That requires more than research. It requires banks, servicers, GSEs, housing finance agencies, mortgage insurers, regulators, consumer advocates, and homeowners to design and test solutions together.
That is where Living Cities can add value. We funded this research because we know our work does not end when a study is done or a report is published. Our role is connecting knowledge to action: bringing capital decision-makers, policymakers, practitioners, and communities together to test promising ideas, learn quickly from what works and what does not, and build evidence that can change institutional practice.
We funded this research to be used. We are ready to work with those prepared to test what comes next.
