Intermediation Frictions in Debt Relief: Evidence from CARES Act Forbearance

Abstract

We study the role of mortgage servicers in implementing the CARES Act mortgage forbearance program during the COVID-19 pandemic. Despite universal eligibility, around one-third of the nonperforming federally-backed loans in our sample fail to enter into forbearance. The relative frequency of these "missing" forbearances varies significantly across servicers for observably similar loans, with small servicers and nonbanks, and especially nonbanks with small liquidity buffers, having a lower propensity to provide forbearance. The incidence of forbearance-related complaints by borrowers is also higher for these servicers. We also use servicer-level variation to estimate the causal effect of forbearance on borrower outcomes. Assignment to a "high-forbearance" servicer translates to a significant increase in the probability of nonpayment, which moves essentially 1:1 with the forbearance probability. Part of this additional household liquidity is used to pay down high-cost credit card debt.