In March 2020, when COVID-19 shutdowns spiked unemployment to 15 percent by the second quarter, a strange thing happened: Delinquency rates on consumer loans dropped.
That is, according to a new paper from business schools of the universities of Columbia, Northwestern, Stanford and Southern California.
Delinquency rates dropped for mainly one reason: Debt forebearance.
Between March and October, loans worth $2 trillion went into forebearance, which is not loan forgiveness, but instead offers borrowers the chance to put off payments until later. In the first seven months of the pandemic, delinquencies dropped from 3 percent to 1.8 percent. Compare that to the housing crisis and recession of 2008, when mortgage delinquencies rose from 2 percent to 8 percent, causing a downward spiral in home prices as lenders foreclosed and consumers frantically tried to sell.
President Trump's CARES Act required forebearance on federally insured mortgages — the majority of all mortgages.
In addition, lenders, instead of foreclosing, have viewed the crisis as temporary, according to Fortune.
Researchers believe that forebearance was the reason mortgage delinquencies stayed low and did not subsequently depress housing prices.
Meanwhile, lenders unaffected by the CARES Act also decided that giving borrowers more time would be good for business.
What remains to be seen is how banks and credit unions fare with trillions of dollars uncollected because of forebearance. According to the research paper, an estimated 60 million borrowers will miss $70 billion in debt payments by the end of the first quarter in 2021. One third of borrowers in forbearance have continued to make their full payments, however.
