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Home | Events Archive | How Do Households React to Debt Forbearance? Evidence from Microdata

How Do Households React to Debt Forbearance? Evidence from Microdata

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    March 29, 2023
    12:45 - 14:00

Drawing on the lessons of the 2008-2009 foreclosure crisis, governments worldwide implemented large-scale debt moratoria in response to the COVID-19 pandemic. We study household debt forbearance using account-level transactions from a large Portuguese bank and a unique setting combining government and private forbearance. We show that the suspension of mortgage repayments can have significant and persistent effects on households’ consumption and savings at 25 and 40 cents per euro of postponed payments. The effect is heterogeneous across households with different income and wealth: low-income and low-wealth households spend 74 cents per euro, consuming above their pre-pandemic average, while high-income and high-wealth households save 79 cents per euro with no effect on consumption. In addition, we find similar effects for the small group of households that accepted the extension of the forbearance offered by banks at the end of the government forbearance. Our findings suggest that more targeted debt relief programs can avoid household financial distress with a lower cost to financial institutions.