Household Liquidity and Macroeconomic Stabilization: Evidence from Mortgage Forbearance 
A provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed all borrowers of federally backed mortgages who experienced pandemic-related financial hardship to request forbearance without having to provide evidence of that hardship. When they exited forbearance, borrowers were typically given the option to defer repayment of their missed payments until the end of their mortgage term. This paper estimates the stabilizing effects of mortgage forbearance implemented under the CARES Act during the pandemic recession. The empirical analysis examines the labor market recovery of US regions that varied in the amount of liquidity provided through mortgage forbearance.
Key Findings
- During the COVID-19 pandemic, a 1 percentage point increase in the share of mortgages in forbearance led to a 30 basis point increase in monthly employment growth in nontradable industries in the 18 months following statewide business openings.
- Estimates from a model incorporating geographical heterogeneity in intermediation frictions imply that the household-level marginal propensity to consume (MPC) out of the increased liquidity from CARES Act forbearance is in line with existing estimates for the MPC out of direct fiscal transfers.
- The implied debt-financed fiscal-multiplier effects of forbearance are sizable but depend on the repayment terms of deferred payments and the monetary policy stance.
Implications
The large returns to forbearance-based fiscal stimulus stem from its cost-effectiveness as a means of temporary liquidity provision that obligates borrowers to ultimately repay the deferred payments in the future. As a result, the direct outlay needed to implement the policy is small compared with the benefit. This feature sets forbearance apart from other forms of fiscal stimulus that rely on direct fiscal transfers. Overall, this paper’s findings suggest that mortgage forbearance is an effective stabilization tool, particularly when coupled with accommodative monetary policy.
Abstract
We estimate the impact of household liquidity provision on macroeconomic stabilization using the 2020 CARES Act mortgage forbearance program. We leverage intermediation frictions in forbearance induced by mortgage servicers to identify the effect of reducing short-term payments with little change in long-term debt obligations on local labor market outcomes. Following statewide business reopenings, a 1 percentage point increase in the share of mortgages in forbearance leads to a 30 basis point increase in monthly employment growth in nontradable industries. In a model incorporating geographical heterogeneity in intermediation frictions, these responses imply a household-level marginal propensity to consume out of increased liquidity that aligns with existing estimates for direct fiscal transfers. The implied debt-financed fiscal multiplier effects of forbearance are sizable but depend on the repayment terms of deferred payments and the monetary policy stance.