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Forbearance as Credit?

Widespread loan forbearance during COVID has led to fewer delinquencies than 2008 financial crisis, new research co-authored by USC Marshall shows

February 15, 2021

USC Marshall Assistant Professor of Finance and Business Economics Erica Xuewei Jiang’s recent research on debt relief has been making the rounds lately, showing up in several prominent publications, including Fortune, Money, and Brookings.

Her area of research is especially important now given the current COVID crisis that has affected so many borrowers. Jiang and her co-authors (Gregor Matvos, Northwestern Kellogg; Tomasz Piskorski, Columbia; and Stanford’s Amit Seru and Susan F. Cherry,) wondered if the same foreclosure situation that occurred during the 2008-09 financial crisis would also occur during the current crisis.

In a new working paper, Jiang and her co-authors study debt relief actions during the pandemic using data that covers the entire US. They had four main goals: to document the overall amount of forbearance, to assess who benefits from debt forbearance, to analyze the role of government mandates for implementation of debt relief actions, and to draw broader implications for debt relief policies.

There have been some surprising findings. For instance, the magnitude of the forbearance program—$2 trillion and more than 60 million borrowers—and the fact that relief flows most to those with higher incomes because of their higher debt balance. A full 60% of total debt relief has gone to those with incomes above the median of $37,000.

But perhaps most surprising is that many people—a third of borrowers—haven’t even stopped making full payments at all. Instead, they are using forbearance as more of a credit line that they can use in the future if they need to. The form and magnitude of the current debt relief may explain why there are far fewer delinquencies than during the Great Recession. Additionally, the debt relief benefits many borrowers whose income level may have made them ineligible to receive stimulus checks.

Jiang and her co-authors also sought to identify the entities that provide debt relief. They found more than a quarter of debt relief came from the private sector that actually had no government mandate to provide such relief. Jiang said, “We found differences in banks’ and shadow banks’ propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks. One possible reason is their limited funding capacity.”

Currently, Jiang and her co-authors are working to expand the working paper through more analysis and plan to submit it for publication in the near future.

In two additional related papers co-authored solely by Jiang and also along with several of her co-authors, the researchers are investigating the difference between banks and shadow banks in terms of their funding sources and how that difference affects the efficiency of government programs and pass-through of policies.

Jiang said, “One important lesson we learned from the Great Recession was that institutional features of financial institutions that implement government policies affect the pass-through of government subsidies. Unlike last time, banks are no longer the main dominant players in the consumer credit market for mortgage and auto loans; the central role of shadow banks in evaluating policies and regulations is accepted by both academics and regulators/policymakers.”

Jiang received her Ph.D. in finance from the University of Texas at Austin and came to USC Marshall in the summer of 2020.