How Did the United States Recover from the 2008 Mortgage Crisis?

The United States recovered from the 2008 mortgage crisis through emergency action by several parts of government: the Federal Reserve held short-term rates near zero and bought up to $1.25 trillion of mortgage bonds, regulators took over Fannie Mae and Freddie Mac, Treasury used the $700 billion Troubled Asset Relief Program (TARP), and federal programs produced about 1.7 million loan modifications and 3.5 million HARP refinances. The recovery was slow. Payroll jobs did not return to their pre-recession level until May 2014, and national home prices did not regain their 2006 peak until January 2017.

For why the crisis started, see what caused the 2008 mortgage crisis. Exact dates for each step are in the timeline of the 2008 crisis.

What did each part of the government do?

The Fed said its March 2009 expansion of MBS buying was meant "to provide greater support to mortgage lending and housing markets." FHFA describes the conservatorship's purpose as restoring Fannie Mae and Freddie Mac to a sound and solvent condition so they could keep carrying out their mission of buying and guaranteeing mortgages. Whether Fannie Mae and Freddie Mac caused the crisis covers their role and how much Treasury put in.

Treasury also provided funding through the Hardest Hit Fund to 18 states and the District of Columbia. State housing finance agencies used it to design their own foreclosure prevention programs and had assisted more than 292,000 homeowners by the end of 2016.

What choices did struggling homeowners have?

A homeowner who was behind on payments, or underwater (owing more than the home was worth), had six main paths:

Modification results. HAMP produced about 1.68 million permanent modifications by the end of 2016. The median reduction in individual borrowers' monthly payments was about $470, and Treasury estimated $48 billion in total payment savings. Many did not last: 577,266 permanent HAMP modifications had been disqualified by then, which generally happened after a borrower missed three payments. Of homeowners who were turned down for HAMP or dropped out of a trial, Treasury's servicer survey found 58% got a different modification or resolved the delinquency, and 23% were referred to foreclosure.

Refinance results. HARP began April 1, 2009, and was extended several times. It covered Fannie Mae and Freddie Mac loans made on or before May 31, 2009, with balances above 80% of the home's value, for borrowers who were current on payments. Loans had to be started by December 31, 2018, and about 3.5 million borrowers refinanced through it.

Exits without foreclosure. HAFA, the Home Affordable Foreclosure Alternatives program, completed 453,602 short sales and deeds in lieu through 2016, with about $30 billion in debt relief. Alternatives to foreclosure compares the options available now by loan type, including whether you can still owe the shortfall.

Walking away. Some underwater owners who could still pay chose to stop. The strategic default article covers the credit, tax, and deficiency consequences.

What protections replaced the crisis-era programs?

The emergency programs have closed. HAMP required applications by December 30, 2016, and HARP ended with loans started by December 31, 2018. Permanent servicing rules and programs such as Flex Modification remain.

CFPB servicing rules, part of the mortgage rules required by Dodd-Frank, now apply to most mortgage servicers:

1. No early foreclosure filing. A servicer generally cannot make the first foreclosure notice or filing until you are more than 120 days behind.
2. Review before sale. If you send a complete application for help more than 37 days before a scheduled foreclosure sale, the servicer must evaluate you for every option it offers within 30 days and tell you its decision in writing.
3. No sale during review. Once foreclosure has started, a complete application received more than 37 days before the sale generally stops the servicer from moving for judgment or holding the sale until the review and any appeal are done.

For Fannie Mae and Freddie Mac loans, Flex Modification, which servicers had to offer by October 1, 2017, replaced the Standard and Streamlined Modifications that ran alongside HAMP. The HARP replacements, Fannie Mae's high loan-to-value refinance option and Freddie Mac's Enhanced Relief Refinance, allowed lenders to sell qualifying refinance loans to the two companies starting January 1, 2019. Fannie Mae has paused buying these loans, and Freddie Mac's Enhanced Relief Refinance is suspended until further notice. If you are underwater and current today, ask your servicer whether any high loan-to-value refinance is available for your loan.

Dodd-Frank also changed how loans are made, through the federal ability-to-repay rule. Protecting yourself from a future mortgage crisis explains what that rule does and does not prevent.

How long did the recovery take?

Treasury's year-end 2016 report showed the same slow repair from 2009 to 2016: homeowners 30 or more days behind fell from 6.1 million to 2.7 million, and underwater homeowners fell from 10.2 million to 3.2 million.