Study Shows Mortgage Forbearance Helps Stabilize the Economy

The effectiveness of allowing borrowers to suspend mortgage payments as a means of stabilizing the economy during a recession has been a subject of interest, particularly in the context of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In a recent working paper, researchers investigated the impact of mortgage forbearances on labor market stability during the pandemic-induced recession.

Study Shows Mortgage Forbearance Helps Stabilize the Economy

Their analysis revealed that the measures implemented under the CARES Act, which included mortgage forbearances, played a crucial role in bolstering local demand as the economy entered the recovery phase. This observation holds significance due to the historical tendency for limited household liquidity to dampen overall demand during economic downturns.

Drawing attention to the aftermath of the Great Recession, the researchers noted the destabilizing effects caused by a wave of defaults following the housing crisis. These effects reverberated through both local and aggregate economic activity, persisting for an extended period. The lessons from this experience have since prompted policymakers and academics to actively consider strategies to prevent defaults and stimulate consumption among distressed borrowers, with the overarching goal of promoting macroeconomic stability during crises.

The CARES Act, recognizing the fluctuating liquidity needs of households during economic downturns, introduced measures allowing federally-backed mortgage borrowers to suspend payments for up to 18 months without incurring fees or penalties. Upon exiting forbearance, borrowers were typically offered the option to defer repayment of missed payments until the conclusion of their mortgage term, structured as a second-lien loan.

Two notable features of the mortgage forbearance program provided a basis for assessing its impact on local labor markets. 

  1. Firstly, despite broad eligibility, enrollment in mortgage forbearance required households to actively request it, resulting in significant regional variations in forbearance uptake. 
  2. Secondly, in contrast to other fiscal policies, the program’s implementation was carried out by mortgage servicers responsible for collecting monthly payments and facilitating transactions with investors in mortgage-backed securities.

The research findings indicate substantial differences in mortgage servicers’ propensity to provide forbearance. Utilizing loan-level data for government-sponsored enterprise mortgages, the study demonstrated that these variations could not be fully explained by observable loan and borrower characteristics. Instead, servicers exhibited differences of up to 7 percentage points in forbearance provision to observably similar borrowers. This highlights the nuanced nature of the implementation of mortgage forbearance and its impact on regional disparities in accessing these relief measures.

The study leveraged variations induced by mortgage servicers to evaluate the influence of forbearance provision on regional employment outcomes. Significantly, our estimates indicate that in the 18 months following statewide business reopenings, a one percentage point increase in the forbearance rate correlated with an approximately 30 basis point rise in monthly employment growth in “nontradable” sectors, including retail trades, accommodations, and food services. This substantial effect suggests that the widespread availability of forbearance played a significant role in stabilizing local economic conditions during the recession of the pandemic era.

In summary, the findings of the working paper indicate that allowing borrowers to temporarily suspend mortgage payments, as exemplified by the CARES Act measures, can be an effective strategy for mitigating the adverse economic impacts of a recession. By preventing widespread defaults and supporting household liquidity, such measures contribute to maintaining and even boosting local demand, thereby fostering a more stable economic recovery.