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,we document that a significant number of federally backed mortgage borrowers be-come delinquent during the pandemic without successfully entering into a forbearance program, and that the relative frequency of these "missing" forbearances varies significantly across mortgage servicers for otherwise identical loans. Forbearance out-comes are systematically related to servicer characteristics including size, liquidity and organizational form, consistent with the role of economic incentives in shaping servicer behavior. We also use servicer-level variation in forbearance outcomes to estimate the causal effect of forbearance on borrower outcomes. We find that assignment to a "high-forbearance" servicer translates to a significantly higher non-payment rate,and we find evidence that part of this additional household liquidity is used to pay down high-cost credit card debt.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2022017pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2022-03-31