Save at Home: Building Emergency Savings One Mortgage Payment at a Time

Abstract

This chapter explores the potential of behaviorally motivated “mortgage reserve accounts” as an automated tool to build emergency savings for otherwise vulnerable low- and moderate-income (LMI) households purchasing their first homes. Financial shocks, such as involuntary unemployment or reduction in wages, and unexpected expenses, such as emergency furnace replacement or roof repairs, within the first few years of homeownership can derail the fragile financial foundation of LMI households and put them at risk of losing their homes through foreclosure. Most LMI households enter homeownership with little equity or residual savings—holding on average only $2,000 in liquid assets, including cash on hand and savings and checking accounts (Moulton et al. 2011; Van Zandt and Rohe 2011). Although homeowners are building equity through their monthly mortgage payments, that equity is not accessible for consumption until the loan balance falls below a leverageable threshold (typically, 80 percent of the value of the home). To the extent that extending homeownership to LMI households remains a policy goal, scalable strategies to offset the higher default risk of such mortgages become a critical, yet challenging, objective.