Working Paper

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.

Keywords: Mortgage; Forbearance; Debt relief; CARES Act; COVID-19; Liquidity;

JEL Classification: G21; G23; G28;

https://doi.org/10.17016/FEDS.2022.017

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2022-03-31

Number: 2022-017