Government and private household debt relief during COVID-19

We follow a representative panel of US borrowers to 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. The amount and incidence of debt relief is large enough to significantly dampen household debt distress and 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, including individuals with lower credit scores, lower incomes, and in regions with a higher likelihood of COVID-19 related economic shocks and higher shares of minorities. Moreover, about 55% of aggregate 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. Forbearance is designed as a temporary bridge to absorb liquidity shocks faced by households. A fifth of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line, allowing borrowers to “draw” on payment deferral if needed. About 60% of borrowers already exited forbearance, with most of them owing nothing or quickly repaying their postponed payments. On the other spectrum are more financially vulnerable and lower income borrowers who are still in forbearance with an accumulated debt overhang of about $60 billion ($3,900 per person/$14,200 for mortgage borrowers) that they are unlikely to repay quickly. We propose that unwinding this debt by spreading repayments over time may alleviate distressed households’ liquidity constraints. More than 20% of total debt relief was provided by the private sector outside of the government mandates. 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, which differ in their propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks.