Erica Xuewei Jiang

We study the suspension of household debt payments (debt forbearance) during the COVID-19 pandemic. Between March 2020 and May 2021, more than 70 million consumers with loans worth $2.3 trillion entered forbearance, missing $86 billion of their payments. This debt relief can help explain the absence of consumer defaults relative to the evolution of economic fundamentals. Borrowers’ self-selection is a powerful force in determining forbearance rates: relief flows to households suffering pandemic induced shocks who would have otherwise faced debt distress. Moreover, 55% of forbearance is provided to less creditworthy borrowers with above median income and higher debt balances – i.e., those excluded from income-based policies, such as the stimulus check program. A fifth of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line. About 60% of borrowers already exited forbearance while more financially vulnerable and lower income borrowers are still in forbearance with an accumulated debt overhang of about $60 billion 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 a third. Government relief is provided through private intermediaries, with shadow banks less likely to provide forbearance than traditional banks.

Shadow banks service a substantial portion of household debt in the US 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 significantly lower (27%) 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 fragility of shadow bank servicing during downturns that can impede the pass-through of debt relief to households.