In housing crises, high mortgage debt can feed a vicious circle of falling housing prices and declining consumption and incomes, leading to higher mortgage defaults and deeper recessions. In such situations, resolution policies may need to be adapted to help contain negative feedback loops while minimizing overall loan losses and moral hazard. Drawing on recent experiences from Iceland, Ireland, Spain, and the United States, this paper discusses how economic trade-offs affecting mortgage resolution differ in crises. Depending on country circumstances, the economic benefits of temporary forbearance and loan modifications for struggling households could outweigh their costs. After a rapid buildup of household debt, the recent crisis triggered unprecedented mortgage distress in several advanced economies. In these countries, growth in the years preceding the global financial crisis was characterized by a rapid accumulation of household debt and rising property prices. The global financial crisis lead to a sharp repricing of risk and reduced availability of bank funding. These developments laid bare real estate bubbles and unsustainable household debts, triggering severe housing busts in some cases like Iceland, Ireland, Spain and United States.

In normal times, swift and low-cost foreclosure and insolvency procedures entailing the disposal of debtor’s assets can promote timely resolution and protect against borrower moral hazard. In a systemic household debt crisis, however, applying this framework risks deepening and prolonging the recession. In contrast with corporate debt crises, where protracted corporate insolvency can reduce the recovery value and distort the allocation of financial resources, mortgage losses are less sensitive to the duration of distress. Deferring the enforcement of collateral during a period of uncertainty about borrowers’ finances and illiquidity in housing markets can therefore act as a circuit breaker that contains a downward spiral of house prices and incomes and facilitates recovery. The recovery, in turn, enables lenders to triage cases suitable for value-maximizing loan restructurings from cases where least cost resolution requires foreclosure. However, maintaining a sound debt servicing culture and limiting moral hazard requires appropriate safeguards against free riding and efficient foreclosure as last resort.