Shadow Bank Distress and Household Debt Relief: Evidence from the CARES Act

Abstract

Shadow banks service a substantial portion of household debt in the United States, including half of residential mortgages. They also funded and implemented a large portion of the CARES Act-driven debt relief. Despite uniform policy and similar borrowers, shadow banks offered debt forbearance at a significantly lower (27 percent) rate compared to traditional banks. Better-capitalized shadow banks offered forbearance at a much higher rate, and those with larger exposure to servicing related liquidity shocks reduced this exposure by selling their servicing rights. We highlight the fragility of shadow bank servicing during downturns that can impede the pass-through of debt relief to households.

Intermediation Frictions in Debt Relief: Evidence from CARES Act Forbearance

“…Our results, and those of Cherry et al (2022), also show how debt relief outcomes are connected to the financial health and regulation of mortgage intermediaries. Nonbanks are now responsible for a majority of mortgage lending and servicing, but these entities are less regulated than banks and face significant liquidity and run risk (Pence, 2022;Kim et al, 2018).…”

“…Like us, Cherry et al (2021) find that nonbanks provided forbearance at lower rates. Cherry et al (2022) find that better-capitalized nonbanks were more likely to provide forbearance, and trace out how nonbanks adjust their balance sheets in response to the shock of the pandemic. Research on other pandemic relief programs also finds variation in outcomes across financial intermediaries (e.g., Granja et al 2020).…”

“…14 Results in table 3 are related to contemporaneous analysis by Cherry et al (2022) also studying the relationship between forbearance provision and servicer characteristics using a different but overlapping sample. Cherry et al (2022) do not investigate the role of liquidity constraints, which is likely to be particularly important for our sample given the much greater liquidity risk associated with Ginnie Mae mortgages (as discussed in section 5.2). In other respects our results are consistent with Cherry et al (2022); e.g., both studies find that large servicers and bank servicers are more likely to provide forbearance.…”

“…Cherry et al (2022) do not investigate the role of liquidity constraints, which is likely to be particularly important for our sample given the much greater liquidity risk associated with Ginnie Mae mortgages (as discussed in section 5.2). In other respects our results are consistent with Cherry et al (2022); e.g., both studies find that large servicers and bank servicers are more likely to provide forbearance. 15 We identify forbearance-related complaints using a similar approach to Consumer Financial Protection Bureau (2021b), searching for complaints with a narrative field containing the string "forbear" or "defer", restricting the sample to complaints related to a mortgage which is a government loan, to be consistent with our Ginnie Mae sample.…”