Heterogeneity in the Effect of COVID-19 Mortgage Forbearance: Evidence from Large Bank Servicers

Lan Shi
U.S. Department of the Treasury

The views herein are those of the author and do not necessarily represent the views of the Office of the Comptroller of the Currency or the U.S. Department of the Treasury. All errors or omissions are the sole responsibility of the author.

This study examines the effectiveness of COVID-19 mortgage forbearance programs using data from the largest national bank servicers. Analyses of the data indicate that the forbearance entry rate was higher for borrowers with lower credit scores and in areas with higher unemployment rates. Some borrowers under forbearance had high credit scores, and a significant proportion continued to pay. Borrowers who had higher credit scores, made more payments under forbearance, and experienced greater labor market recovery were the earliest to exit the forbearance. Borrowers exited forbearance via different forms, with a large proportion delaying the payments of the forborne amount at maturity, refinance, or the property sale.

One potential downside of nonpayment under forbearance is its adverse impact on ability to be refinanced, which is supported by some empirical evidence. However, the effect was short-lived, likely due to programs that attempted to alleviate this adverse effect. These pieces of evidence support an interpretation that forbearance programs supported borrowers adversely affected by COVID-19 event, but incentives should be built in to encourage exits to facilitate wealth accumulation.