Did Mortgage Forbearance Reach the Right Homeowners? Income and Liquid Assets Trends for Homeowners during the COVID-19 Pandemic

COVID-19 devastated the US labor market threatening homeowners’ ability to stay current on their mortgage. During the Great Recession, payment relief was more difficult to come by whereas the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided most impacted homeowners with up to 12 months of payment relief if they attested to COVID-related hardship. However, the CARES Act did not cover everyone—it was silent on non-federally backed mortgage holders and those experiencing non-COVID related hardship. Furthermore, many borrowers were either not aware of mortgage relief options and/or were worried about potential balloon payments after forbearance ends. How well did this widespread intervention work? Did it reach all those who might have benefitted? Is there evidence of widespread moral hazard? Using checking account data linked to loan-level mortgage servicing data, we explore these questions. We find that while a third of homeowners in forbearance made all payments to date, a small fraction of homeowners not in forbearance did miss payments. Also, we find little evidence of widespread moral hazard. Families using forbearance to miss mortgage payments showed larger drops in total income than other homeowners and experienced income changes similar to those who have gone delinquent without the protection of forbearance. Also, families in forbearance were more likely to have lost labor income and received UI than families not in forbearance. Finally, we find that forbearance helped families with low levels of liquid assets to maintain their cash buffers. Together these results suggest that CARES Act mortgage forbearance policies helped homeowners experiencing financial hardship in a material way by allowing them to miss payments without adversely affecting their credit scores and maintain their small cash buffers in a world with a lot more economic uncertainty. In addition, these benefits came with little evidence of material moral hazard. However, there is room for improvement in future legislation as a small fraction of homeowners facing hardship did not benefit from forbearance and one main impediment was confusion around balloon payments. All in all the CARES Act forbearance policies appear so far to have been a large step in the right direction relative to policies during the Great Recession.