Key Highlights

  • Odeta Kushi, deputy chief economist with First American Financial Corporation, wrote that understanding foreclosures is a two-step or “dual trigger” hypothesis
  • Kushi believes two-step process is not in play here
  • Kushi believes renters will feel impact of recession more than homeowners

Odeta Kushi, deputy chief economist with First American Financial Corporation, writes that the COVID-recession may be different from and with fewer foreclosures than the Great Recession. Why? According to Kushi, “A proper prediction of things to come includes understanding foreclosure’s two-step process or “dual trigger hypothesis.”

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This two-step hypothesis means that a homeowner suffers some sort of adverse economic shock such as a loss of income or serious illness or a death of a spouse that can lead to mortgage delinquency. In other words, step one is a loss of income that could result in not being able to pay the mortgage.

Mortgage delinquency, however, does not automatically translate into foreclosure. A homeowner could have sufficient home equity that would enable her to sell or refinance the house. Or a homeowner could have low equity but not suffer from a financial sellback. Either way, that homeowner would not face foreclosure.

Kushi writes, “Alone, economic hardship and a lack of (home) equity are each necessary, but not sufficient to trigger a foreclosure. It is only when both conditions exit that a foreclosure become a likely outcome.”

Kushi helps us remember that in the Great Recession, high levels of housing debt combined with declining home prices for a result of a -5.6% decline in home equity from Q1 2008 to Q2 2009. During this same period of time, unemployment (job loss) doubled. This dual-triggered or two-step process led to a quadruple wave of foreclosures.

This COVID recession, argues Kushi, is different than the Great Recession. This time, the housing market is in a stronger position buoyed by much stricter lending standards. The household debt-to-income ratio is at a four-decade low and household equity is at a nearly three-decade high. Additionally, according to the Mortgage Bankers Association, the majority of homeowners who went into forbearance program under the CARE Act have been paying their current mortgage payments or have been paying off their home loan via a home sale or a refinance.

As important this time around if not more important, data from the Census Pulse Survey indicates that renters are facing harder times than homeowners. 53% of renter households have experienced job/income loss in this COVID recession while 39% of owner households have suffered job/income loss.

Kushi wrote that “Some foreclosures are still likely to happen,” during this COVID recession “…but this time, it’s different – only one of the dual triggers exists today.”


Thanks to Kushi’s First American foreclosure projections and dsnews.

Also read: Inman’s Guide to 2020, 2025, 2030 and Beyond – Part I, Tappable Home Equity Hits Record $6.5T in Q1 2020, Applying of a HELOC? Do It Sooner Rather than Later


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