If interest rates go up and that causes housing prices to drop, the same monthly payment can now only purchase a lower-cost house. People might not be able to sell for what they paid. Then if they need to move they must bring cash to the table. Even those that can afford to bring cash might still decide to go the foreclosure route.

In 2008 we even saw people pro-actively defaulting because they didn't want to make payments on something that was worth half of what they paid.

I'm not predicting any of this, but it is a possibility.

When housing drops significantly in value the debt is higher than the value of the home, making it underwater: now it is better for the borrower to default than to make payments. If you get defaults, then the bank has to flip the home into the market, increasing supply and dropping price, etc etc.

The narrative of 2008 has made lots of people believe that it was improper risk assessment, but the cycle of leverage and asset price fluctuation is the core mechanic and it acn easily repeat itself.

Adjustable rate mortgages and people who need to move who are now underwater. I couldn’t easily find nationwide stats on ARM issuance, but a quarter of First Republic Bank’s loans are adjustable rate.

https://ir.firstrepublic.com/static-files/1a464a0b-9396-4bd4...