The Regulated Recession: What We've Learned Over 14 Years

Mortgage part 3, recession, header image. A couple stands in front of a house.

December 21, 2022 | Allied Solutions

If 2021 and 2022 had a winner of the year, it would be homeowners. This span of time produced a sellers’ market as interest rates hit record lows and home prices soared – with homes selling almost as fast as they were listed. In addition, refinancing boomed as homeowners looked to reduce their monthly payments and cash in on their home equity. But, every peak has its valley, and the excitement started to diminish as talks and debates of a recession started to stir. 

One might think recessions of the past would easily help to determine if we are in one or about to be without much question (2008 wasn’t that long ago, right?). However, what we learned from 2008 (aka The Great Recession) along with subsequent changes and advances (like how financial institutions can better protect themselves), and of course – the pandemic - over the last 14 years have ultimately altered how accurately we can predict future recessions and their potential effects on the economy.

Recession 101

As a refresher, what exactly constitutes a recession? According to the National Bureau of Economic Research (NBER), a recession is the period between a peak of economic activity and its subsequent lowest point and involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. 

Recession indicators measure a variety of economic activities, such as two consecutive quarters of negative gross domestic product growth (GDP), but also historically include: 

Recession 101 graphic list. First reason, steady decline in unemployment. Second reason, decline in real income. Third reason, decline in industrial production. Fourth reason, wholesale and retail sales adjusted for price changes. Fifth reason, nonfarm payroll employment.

The (Not So) Great Recession

Since World War II, the United States has made its way in and out of 13 recessions, with the last one being The COVID-19 Recession in February-April 2020. Still, it’s The Great Recession of 2008 (specifically December 2007-June 2009) that sticks in the minds of most Americans as the subprime mortgage crisis contributed to the longest and most catastrophic economic downturn since the Great Depression, following a housing market boom just a couple of years prior. 

The paths to 2008 and 2022/2023 started out similarly. Interest rates in the early-to-mid 2000s were considerably low and those who previously struggled to own a home due to higher interest rates were now able to, creating a housing boom. However, the lack of lender/lendee accountability that helped lead to The Great Recession sets the two paths far apart. 

In 2008, loan writing guidelines were very liberal, making it easier for almost anyone to get approved. Some of the guidelines that were followed included:

Guidelines list for 2008 loan writing. Guidelines included using stated income and assets, not verifying employment, accepting low credit scores, accepting high debt ratio limits, allowing interest-only loans, allowing negative amortization, and stated property values were inflated.

This underwriting recklessness in turn led to an abundance of fraud in the housing market, such as:

Listed results of abundance of fraud in the housing market. Results included investor oversaturation which drove up house prices, unregulated mortgage brokers, appraisers hired by mortgage brokers working together to inflate property values and qualify for loans, excessive seller concessions to sell properties, nearly 25% of homeowners in a negative equity position, and house flippers making up a large part of the market.

The TBA (To Be Announced) Recession

While some recession indicators have been present in 2022 (two consecutive quarters of negative GDP), another strong indicator – a rise in unemployment rates – has not. Unlike 2008, attention is being closely paid to changes in interest rates, inflation, and how the economy is able to adjust. There are also global factors to consider, as with previous recessions, such as being post-pandemic and Russia’s invasion of Ukraine. 

The housing marketing did learn a few things from 2008, especially how to tighten up guidelines and regulations. Now, stricter underwriting guidelines are in place, including:

List of stricter underwriting guidelines. The list includes verifying income and assets, employment verification, higher credit score floors, debt ratios controlled with lower maximums, adjustable-rate mortgages are not as common, not including interest-only loans, not having negative amortization loans, and more regulations for underwriting on investment properties.

The housing market today is also less susceptible to fraud, thanks to The Great Recession. Now we see a regulated industry that focuses on maintaining a conservative approach to thwart any future mortgage crisis. New regulations include:

List of new regulations to prevent future mortgage crises. The list includes housing prices driven up by low inventory instead of value inflation, mortgage brokers are a lesser part of the market and are more regulated, use of an appraiser being more regulated to eliminate working with other parties for value inflation, seller concessions being controlled through tighter underwriting guidelines, almost-nonexistant negative equity, and mortgage debt at an all-time low in the US.

A Regulated Recession?

If we can thank The Great Recession for anything, it’s the importance of guidelines and regulations. Recessions will possibly always be a reality, but learning and growing from the previous one(s) can help mitigate the damage and overall effects of future recessions – turning what used to be a catastrophic crisis into more of a regulated decline. 

About Allied Solutions

Allied Solutions is one of the largest providers of insurance, lending, risk management, and data-driven solutions to financial institutions in the US. Allied Solutions uses technology-based solutions customized to meet the needs of 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions is headquartered in Carmel, Indiana and maintains several offices strategically located across the country. Allied Solutions is a wholly owned and independently operated subsidiary of Securian Financial Group.

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