Government and private household debt relief during COVID-19
Massive government and private sector-mandated debt relief during the COVID-19 pandemic was well targeted and helped ease the economic distress of millions of Americans, according to an article to be discussed at the Brookings Papers conference on Economic Activity (BPEA) on September 9. .
About 60% of borrowers who opted out for debt forgiveness graduated in May, but an important policy question arises as to how to deal with any “forgiveness surplus”, especially for mortgages, if the loan forgiveness is overdue. ‘mandatory abstention expires as scheduled at the end of September, write to authors: Susan Cherry and Amit Seru from Stanford Graduate School of Business, Erica Jiang from University of Southern California, Gregor Matvos from Northwestern University and Tomasz Piskorski of Columbia University.
In Government and private household debt relief during COVID-19, the authors studied forbearance using a representative panel of credit bureaus of more than 20 million U.S. consumers. They estimate that between March 2020 and May 2021, more than 70 million consumers with loans worth $ 2.3 trillion went into forbearance, missing $ 86 billion in their payments. During that time, 6.3 million mortgages, 11 million auto loans, 68 million student loans and 62 million revolving loans (such as credit cards) were withheld.
Government warrants account for about 80% of debt relief during the pandemic, but about 20% (for larger mortgages, auto loans and revolving loans) were provided voluntarily by the private sector, according to the document. Debt relief was automatically extended to all federal student loan recipients, but mortgage borrowers and other types of borrowers had to apply for it. According to the authors, this self-selection function made it possible to develop a better targeted mortgage policy.
“We are seeing that debt relief has met the target, as abstention rates are higher in regions with the highest COVID-19 infection rates and the greatest local economic deterioration.” , they write.
The question now, especially for mortgages still in forbearance, is how borrowers can manage their arrears in a manageable way. The authors estimate that by the end of September, the forbearance surplus for all types of loans will amount to more than $ 70 billion and, for mortgages, to around $ 15 billion (or 14 billion dollars). $ 200 per borrower).
They offer two solutions for mortgages. First, the missed payments could be added to the existing loan balance, which would allow borrowers to spread repayment over the remaining life of the loan, which is on average around 25 years for borrowers withholding. Second, borrowers with federally insured mortgages might be allowed to refinance at the current low mortgage rates and add the missed payments to their new loan balance.
Seru, in an interview with the Brookings Institution, said he was concerned that some lenders, especially non-banks, known as shadow banks, have less ability and experience than other lenders to modify mortgage loans. He suggested he could take additional government action, such as more advice from government-sponsored mortgage insurers Fannie Mae and Freddie Mac. Guidelines allowing only limited discretion to lenders would promote a one-size-fits-all approach, he said.
“I’m afraid the flow is problematic as there is no one size fits all,” he said. “If there isn’t a clear mandate on what the unwinding entails, you’ll see different lenders behaving differently, as we have shown during the Great Recession. Some lenders will say, ‘Look, we can’t handle this, we have to shut down. “
Cherry, Susan, Erica Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru. 2021. “Government and private household debt relief during COVID-19. »BPEA conference project, fall.