It is difficult to believe that it's been 12 years since the subprime mortgage crisis and subsequent recession of 2008. Yet 12 years have in fact passed, and we now face a new — and in many ways, even more daunting — challenge to economic survival and prosperity.
While the coronavirus pandemic that has left the global economy in flux has distinct differences from the 2008 subprime mortgage crisis, several lessons from 2008 remain relevant amid today's uncertain climate.
First, the differences between the challenges of 2008 and 2020 (and likely beyond):
• The recession of 2008-2009 stemmed from fundamental flaws (namely, an abundance of high-risk loans) in the mortgage lending framework. That framework is far sturdier today.
• While mass mortgage defaults in 2008 and 2009 triggered widespread economic ills, the pandemic has had a more direct and widespread impact on all industries than the subprime mortgage crisis did.
• The looming shadow of COVID-19, and the economic contraction that it has prompted, harbors a broad unfamiliarity that is different from the typical recession, including that of 2008-2009.
Still, we can see that behaviors that allowed homeowners to stay afloat and lending institutions to survive (and in some cases, even thrive) in the Great Recession may produce similar results if applied during the current economic downturn.
Lessons For Lenders To Apply Today
1. Flexibility is key, so embrace a nimble business model.
For most lenders, changing a business model may be easier said than done — but to whatever extent you can, embrace a flexible approach. Being nimble may mean:
• Being more discretionary when writing loans, but not ceasing underwriting completely.
• Seeking opportunities for growth instead of applying a blanket contraction mentality to your business operations.
• Embracing the demand for loans and other forms of financial relief without being reckless in your origination processes.
I have found that maintaining an open-door policy to homeowners in need of loans has increased our number of customers served by 150% over the previous month.
2. Maintain a strong cash safety net.
Virtually all responsible lenders keep a “rainy day reserve” of cash or easily liquefiable assets on hand. The proverbial rainy day has arrived for the majority of businesses, and a veritable monsoon could be on the horizon.
Consider the value of a varied approach by which you can continue to grow your business (see lesson No. 3) while also continuing to add to your cash and liquefiable reserves.
3. Grow amid widespread contraction.
The year 2008 and those that followed were lean times, or even bust times, for countless businesses in the home loan and development sectors. However, those who were able to remain nimble and adjust their business model to more affordable, small-scale loans and homes actually made out quite nicely.
If you can fashion your business to cater to the high demand for financial relief without depleting your cash reserves or making risky loans, you could ultimately experience a windfall, or at least a modest profit, by servicing the cash-needy.
4. Be decisive in all that you do.
Times of unfettered growth and prosperity tend to produce unified opinion, while times of great uncertainty such as these naturally breed second-guessing. If you are to rely too greatly on too many opinions, then you will be in a constant state of second-guessing, and your business could be financially paralyzed and possibly submarined as a result.
If a course of action makes sense to you and those you trust the most, enact it, and stick with the plan until you have credible reason to reassess.
These lessons applied soundly post-2008, and they apply now. Implementing these lessons may look different for every lender, but they can be generally applied to help you survive or come out stronger from the pandemic.
Lessons Homeowners Can Apply Today
1. Draw cash from equity.
Many homeowners have seen their salaries or business revenues dry up through no fault of their own. With a widespread dearth of lending or other forms of financial relief, you may be scrambling for funds to pay your mortgage.
You should also assess your store of equity. Speak with a mortgage professional about drawing cash from your home equity, consolidating your debt and otherwise leveraging the value of your assets (your home especially) while it is still relatively high.
2. Tighten the belt, and replenish cash stores.
The No. 1 goal for most homeowners right now is making the payments required to remain in good standing. A secondary (and directly linked) goal should be replenishing your cash savings so that you can make those payments regardless of how the economic climate shakes out in the coming months and years. For most, this means a significant tightening of the belt, which you may have already done.
You cannot make assumptions about when the economy will reopen, or what it will look like when it does. It is vital that you maximize the equity of your home now and dedicate a greater-than-normal amount of your capital to making future mortgage or rent payments.
3. Explore refinancing and other means of relief.
Home and business owners seeking financial relief have found options to be few and far between. Don't give up. Lenders remain open for business and could be willing to provide you the refinancing that you need. In addition, the federal government has promised various forms of relief through institutions such as Freddie Mac and the U.S. Small Business Administration (SBA).
If you are unable to pay your mortgage currently or fear this possibility could arise soon, contact your mortgage servicer about a mortgage forbearance agreement. Such an agreement may protect you from foreclosure or other legal action while implementing new conditions for repayment.
Seeing The Light
Together, lenders and borrowers can make it through this uncertain, strained economic climate. With nimble business approaches, a willingness to lend to qualified borrowers and a dedication to tightening the belt while helping homeowners and business owners survive this stretch, we can all fix our eyes toward the light at the end of the tunnel.