RESEARCH Forbearance for mortgages a short-term solution; savings programs for the long term

JPMorgan Chase Institute Take

The pandemic caused by the novel coronavirus (Covid-19) has left millions of Americans experiencing (at least temporary) job loss—and with it, disruptions to income. While unemployment insurance can help blunt the impact, a spike in mortgage delinquencies and defaults is expected to occur as families face their next mortgage payment in the coming weeks. The government and private sector have taken steps to temporarily halt foreclosures and evictions and to provide loan forbearance to borrowers impacted by the coronavirus. 

JPMorgan Chase Institute Take:

Historically, for those who default on their mortgage, we find that default is preceded by a drop in income—true across borrower income levels, the amount of home equity that a homeowner has, or their total debt-to-income ratio (DTI) at origination of the loan. The shorter the income disruption, the more likely individuals may be able to cut back on other expenditures or draw upon their savings and still pay their mortgage. The longer the severe economic disruptions continue, the more likely we are to see the number of defaults rise.

Our research on modification programs during the Great Recession showed that programs which increased borrower liquidity (through substantial monthly payment reduction) helped reduce default rates, while programs that reduced long-term debt did not. Mortgage forbearance programs being offered by public and private entities are a helpful intervention for those in need right now, providing a form of liquidity to families, and allowing them to prioritize food and other necessities in the immediate future.

Forbearance programs are not long term solutions or sustainable without government support. In the long run, mortgage savings programs like emergency mortgage reserve accounts, or other programs that encourage families to build savings, would be helpful in these types of scenarios, which are expected to last up to a few months. Given the importance of liquidity on families’ ability to weather income volatility, a mortgage savings account in which borrowers are encouraged to hold a few months-worth of mortgage payments may be a successful way to align interests across the system: helping families to bridge considerable short-term fluctuations, and reducing disruptions to the mortgage system.

- Diana Farrell, President and CEO

 

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Authors

Diana Farrell

President & CEO