Why is the Default Rate So Low? How Economic Conditions and Public Policies Have Shaped Mortgage and Auto Delinquencies During the COVID-19 Pandemic

Abstract

Delinquencies and defaults on household debt typically closely follow the business cycle. As economic conditions deteriorate, falling employment and incomes put a strain on family finances, leading to a rise in missed debt payments and defaults. Yet, against the backdrop of a historic rise in unemployment associated with the COVID-19 pandemic, delinquencies have fallen. This FEDS Note documents trends in delinquency on mortgages and auto loans during the COVID-19 pandemic, and unpacks how changes in economic conditions and public policies have been associated with borrowers’ debt repayment behavior.

Economic impacts of the COVID-19 crisis: evidence from credit and debt of older adults

“…While consumer debt can be a source of liquidity to smooth consumption, required monthly payments can also be a source of financial strainparticularly following an income shock. Typically, the onset of an economic crisis such as the COVID-19 pandemic would trigger widespread consumer default on debt payments (Dettling and Lambie-Hanson, 2021). Indeed, many consumers reported difficulty paying bills following the onset of the COVID-19 pandemic (Schneider et al, 2020;Clark et al, 2021).…”

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“…These provisions greatly reduced the financial strain on those suffering reduced income due to the pandemic. As a result, although the rate of delinquency and forbearance on consumer loans was elevated, it has remained below the levels that would have been predicted solely on the deep recession that occurred at the start of the pandemic (see Dettling and Lambie-Hanson 2021). Thus, the programs targeting individuals and businesses have indirectly had the effect of benefiting lenders.…”

COVID-19 as a stress test: Assessing the bank regulatory framework

“…By contrast, the COVID-19 shock hit the U.S. economy within a few weeks in March 2020, triggering a monetary, fiscal, and prudential policy response of unprecedented scope and speed ( Borio, 2020b ). Finally, while the GFC was triggered by and associated with a substantial increase in mortgage and consumer loan default rates, delinquencies actually decreased during the pandemic, driven by the generous forbearance programs of banks and the government ( Dettling and Lambie-Hanson, 2021 ).…”