Government and Private Household Debt Relief during COVID-19

Abstract

We follow a representative panel of US borrowers to study the suspension of household debt payments (debt forbearance) during the COVID-19 pandemic. Between March and October of 2020, loans worth$2 trillion entered forbearance. On average, cumulative payments missed per individual in forbearance during this period were largest for mortgage ($3,200) and auto ($430) borrowers. We estimate that more than 60 million borrowers will miss $70 billion on their debt payments by the end of 2021:Q1. This large amount of debt relief significantly dampened the household debt distress, which can help explain household delinquencies below pre-pandemic levels-a significant difference from other economic crises when delinquencies sharply increased along with unemployment. Forbearance thus may have had potentially large aggregate consequences for house prices and economic activity. Relief flows more to higher income individuals than those receiving stimulus checks, partially due to their higher debt balances: 60% of aggregate forbearance is provided to above median income borrowers. On the other hand, forbearance rates are higher among the more vulnerable populations: individuals with lower credit scores and lower incomes. Borrowers in regions with a higher likelihood of COVID-19 related economic shocks and higher shares of minorities were more likely to obtain debt relief. One third of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line, allowing borrowers to "draw" on payment deferral if needed. More than a quarter of total debt relief was provided by the private sector outside of the government mandates. Exploiting a discontinuity in mortgage eligibility under the CARES Act we estimate that implicit government debt relief subsidies increase the rate of forbearance by about 25%. Government and private relief follow similar patterns across income and creditworthiness, suggesting that borrower self-selection in requesting forbearance is an important determinant of debt relief incidence, and drives the distribution of relief across different population strata. Government relief is provided through private intermediaries, which differ in their propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks.

Deterioration of the subjective financial well-being during the coronavirus pandemic: a latent transition analysis

“…When customers trust their banks, they are confident they will care for their welfare by helping them cover their financial needs (e.g. Merz et al, 2018) This approach to trust in banks fits our study because, during the pandemic, the dependency of customers on external sources of funding rose, and banks were crucial in ensuring that customers got access to funding to cover their financial needs (Baldwin and di Mauro, 2020;Cherry et al, 2021).…”

Late banking transitions: Comparing Uzbekistan to earlier reformers

“…Another problem with temporary deferrals is that they may lead to lower repayment discipline by borrowers, set expectations for banks that such deferrals might be "acceptable" for the supervisor in the future, and predispose future SOCB investors to expect such forbearance after privatization-such as in Mexico from the early 1990s (Gruben and McComb 1997). Correct incentives need to be built into the forbearance programs to achieve beneficial outcomes in the long term (Edwards 2021;Shi 2021;Cherry et al 2021). Proper risk provisioning at an early stage, as well as acting in a forwardlooking manner regarding the allocation of profits, remain paramount for maintaining bank resilience during the COVID-19 crisis, Fidesser et al (2021) argue.…”

Moral Hazard versus Liquidity in Household Bankruptcy

“…Regions with less access to debt relief during the Great Recession experienced persistently weaker economic conditions (Piskorski and Seru (2021)). In contrast, the CARES Act provided swift and substantial debt relief in response to the COVID-19 recession, significantly limiting household financial distress (Cherry et al (2021)). Recently, Auclert and Mitman (2022) argue that countercyclical bankruptcy generosity could have superior welfare benefits, by limiting moral hazard during booms.…”