Why a Recession May Be Coming -- but Not a Foreclosure Crisis

The situation might get worse -- but not when it comes to people losing their homes.

These days, a lot of financial experts are sounding alarms about a possible recession. That's because rising interest rates could lead to a drop in consumer spending, and a rapid one at that. 

That has a lot of people on edge -- especially those who remember the Great Recession that took place between 2007 and 2009. Back then, not only was job loss rampant, but the housing market crashed in a very big way, sending home prices plummeting and forcing many people to lose their homes in the process.

But if a recession hits in the near term, it may not last nearly as long as the Great Recession, and it's unlikely to result in a housing or foreclosure crisis at all. Here's why.

A very different situation

Back when the Great Recession was in full swing, many homeowners were underwater on their mortgages. That meant they owed more on their loans than what their properties could actually sell for. 

A big reason for that scenario was that buyers were allowed to purchase homes with very little money down. And mortgage lenders weren't as strict about letting people borrow. As such, many homeowners wound up with properties they couldn't afford, and when they fell victim to layoffs, they immediately got behind on their housing payments, forcing banks to move forward with foreclosures. 

These days, things are very different. For one thing, mortgage lenders have gotten a lot stricter when it comes to approving borrowing candidates. Secondly, because home values are up right now on a national level, many homeowners are not underwater on their mortgages, even if they made a low down payment or no down payment at all (an option some loan programs, like VA loans, allow for). As such, those homeowners would be unlikely to end up getting foreclosed on because that wouldn't be necessary.

Right now, home-buyer demand is strong. So if a recession were to hit and layoffs were to happen, those who couldn't continue to pay their mortgages would most likely have the option to just list their homes, find buyers, and walk away clean. Foreclosure wouldn't have to come into play, which is a good thing, because it can result in credit score damage.

Plus, foreclosure isn't good for lenders, either. Banks aren't in the business of selling homes. Their goal is to make money by collecting mortgage interest. So the fact that we're most likely not looking at a wave of foreclosures is a positive thing all around.

How to gear up for a recession

Whether you own a home or not, it's a good idea to shore up your finances in case a recession hits and your job winds up on the chopping block. First, boost your emergency fund if you don't have enough money in your savings account to pay for a full three months of living costs. Next, try to pay down costly debt so you're not burdened with those payments at a time when your income may be dropping or going away.

We can't say for sure that a recession is coming, but many financial experts say a downturn is inevitable. That doesn't mean we're in for a repeat of the Great Recession, and it certainly doesn't mean a foreclosure crisis is looming. But it does mean that now's a good time to get prepared.