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

Mortgage forbearance, where monthly scheduled payments are paused, was widely activated in response to the COVID-19 pandemic. This article offers an early examination of its effectiveness by examining borrower forbearance entry, exit, and post forbearance performance of residential mortgage loans held or serviced by largest national banks. We find that the forbearance rate is higher for borrowers with lower credit scores and in areas with higher unemployment rates. Some borrowers under forbearance have high credit scores and a significant proportion continued to pay. Borrowers who have higher credit scores, made more payments under forbearance, and experienced greater labor market recovery were the earliest to exit the forbearance. Borrowers exit 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 non-payment under forbearance is its adverse impact on ability to be refinanced, for which we find some empirical evidence. However, the effect is short-lived likely due to programs that attempt 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.