Government and Private Household Debt Relief during COVID-19

ABSTRACT: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 that would otherwise have faced debt distress. Moreover, 55 percent of forbearance is provided to less creditworthy borrowers with above median income and higher debt balances—that is, 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. By May 2021, about 60 percent of borrowers had already exited forbearance while more financially vulnerable and lower income borrowers were 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.