What happens with mortgages if there’s a recession? 

Though mortgage rate relief appears to be on the horizon, it's still anyone's guess which direction the housing market will go in 2024.

The threat of a recession still looms in the background — as it has for at least the last year — which could hinder hopes for an economic "soft landing" and a revival for the real estate market. Would a recession bring a tidal wave of short sales? What options do homeowners have if they find themselves unable to make their mortgage payments? Are 40-year mortgages a thing now?

Here's why the housing market is well prepared to roll with the punches. 

The positives of homeowners with less negative equity

Even if joblessness rises in the next couple of quarters, homeowners hold a tremendous amount of equity in their properties, Rick Sharga, founder & CEO of CJ Patrick Company, told Real Estate News — meaning a spike in short sales is unlikely.

"Short sales will be few and far between because there's $31 trillion in homeowner equity out there," he said. "So the overwhelming majority of people have more equity than what they owe on their properties."

It's just one of the main differences between the current economic tepidity and the years following the financial crisis of 2008, Ward Morrison, president and CEO of Motto Mortgage said. During the Great Recession, many people had to result to short sales because they had negative equity in their homes. And while foreclosures were widespread at that time, they're not necessarily the best tool for either homeowners or mortgage providers, he explained.

"Lenders understand that foreclosure in a lot of states is a very complex process and that it's sometimes better to work with the consumer to figure out a new plan," he said, while acknowledging the one silver lining to underwater properties hitting the market: "If a lot of people start selling their homes because they've come across difficult times but have equity, that's going to create inventory, which is good for the market."

When the struggle is real, lenders have more tools to help

While the post-financial crisis years were marked by a surge in foreclosures and short sales, the government and lenders are prepared to act more quickly to help struggling homeowners today. Pandemic-era forbearance plans helped many borrowers survive a difficult period, and similar tools could be used during future economic downturns. 

"The director of FHFA has told both Fannie and Freddie that they need to implement forbearance programs similar to the one the government had during Covid as part of their ongoing loss mitigation programs," Sharga said. "They won't be quite as generous and they won't be quite as long — there'll actually be some documentation required — but there's going to be an emphasis on forbearances going forward."

And lenders already have other tools at their disposal, such as loan modifications and term extensions. A struggling homeowner could keep their existing low interest rate and ask for a 40-year term, Sharga said, which could substantially lower their monthly mortgage payment. 

Lower interest rates could be a boon to borrowers and the mortgage industry

One other option for homeowners — particularly those who purchased in the last year or two — would be a traditional refinance. While it wouldn't make sense for homeowners with a sub-3% mortgage rate, if rates dropped by a percentage point in the next year, it would be worth exploring for those with a 7% interest rate or higher, Morrison suggests.

"Anytime you get anywhere from a quarter to a half percent spread, it's time to look," Morrison said. "I'm not saying it's time to go, but it's time to look."

While mortgage interest rates may never return to the levels seen in 2021, anything around 6% could lead to a "mini refi boom," Morrison said, which would not only help homeowners with high interest rates lower their monthly payments, but it could provide much-needed demand in the struggling mortgage market.