Congressional Report: ‘COVID-19: Household Debt During Pandemic’
WASHINGTON, Oct. 24 -- The Congressional Research Service issued the following report (No. R46578) entitled "COVID-19: Household Debt During the Pandemic". Here are excerpts of the report issued on Oct. 22 and co-authored by Cheryl R. Cooper, coordinator and analyst in financial economics, research librarian Maura Mullins and analyst in macroeconomic policy Lida R. Weinstock:
The Coronavirus Disease 2019 (COVID-19) pandemic has had a large and persistent economic impact across the United States. Fear of infection, social distancing, and stay-at-home orders prompted business closures and a severe decline in demand for travel, accommodations, restaurants, and entertainment, among other industries. This led to a significant reduction in employment and a loss of income in many U.S. households. Unemployment rose rapidly to a peak at 14.7% in April and has since fallen to 7.9% in September. Consequently, many Americans have lost income and faced financial hardship. Survey results suggest that since March 2020, half of all U.S. adults live in a household that has lost some employment income.
As of the second quarter of 2020, different types of consumer debt--consisting of mortgages, credit cards, auto loans, and student loans--have exhibited different patterns during the COVID-19 pandemic. Notably, credit card balances declined sharply by about $76 billion, the largest quarterly decline on record. Mortgage debt increased slightly, and other household debt remained relatively flat.
In addition, during the second quarter of 2020, the percentage of delinquent loans declined in most consumer debt markets.
This pattern differs greatly from that of past recessions, such as the 2007-2009 Great Recession. Some of this decline is due to consumers entering into loan forbearance agreements when they are having trouble repaying their loans. Loan forbearance agreements allow borrowers to reduce or suspend payments for a short period of time, providing extended time for consumers to become current on their payments. These agreements do not forgive unpaid loan payments. Instead, borrowers must repay the amounts owed, and they typically enter into agreements that allow for repayment over an extended period of time.
Policy responses to the economic impacts of the COVID-19 pandemic have likely prevented many consumers from falling delinquent on their loan payments. Part of the congressional response was the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed into law on March 27, 2020. The CARES Act established consumer rights to be granted forbearance for many types of mortgages (Section 4022) and for most federal student loans (Section 3513). The CARES Act's consumer protections, as well as other financial institution loan forbearance programs, likely helped avoid sharp increases in loan delinquencies. The CARES Act also provided fiscal relief, including direct income support, which was likely another important factor making it easier for consumers to pay their existing loan obligations. These actions included enhanced unemployment insurance and relief checks phased out for higher-income taxpayers.
Given the uncertain trajectory of future COVID-19 outbreaks and their economic impacts, whether these consumer debt usage and delinquency patterns will continue is unclear. Future public policy may be able to influence the course of the economic recovery, which could include extending loan forbearance programs, additional fiscal relief, or other policy options. Congress is currently debating whether COVID-19 pandemic relief provisions should be extended or whether the cost of these proposals outweigh their benefits. Active legislation that would modify, extend, or create new economic relief programs includes the Heroes Act (first version: H.R. 6800; second version: H.R. 925) in the House, and the American Workers, Families, and Employers Assistance Act (S. 4318) in the Senate.
In addition, consumers' future access to credit markets may become another risk factor. The congressional response to the COVID-19 pandemic has primarily focused on helping consumers make existing debt payments rather than focusing on access to new credit during the pandemic. If consumers find it difficult to access credit markets, the resulting reduction in consumer spending could harm the economic recovery.
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Contents:
Introduction ... 1
Household Income During the COVID-19 Pandemic ... 2
Household Debt and Delinquency Trends ... 4
* Consumer Loan Forbearance Trends ... 6
Policy Impacts on Household Finances ... 10
* Consumer Loan Forbearance and Other Financial Policy Responses ... 10
* Fiscal Policy Responses ... 11
- Enhanced Unemployment Benefits ... 11
- Economic Impact Payments ... 12
Future Household Finance Outlook ... 13
* Future Macroeconomic Outlook Uncertainty ... 13
* Future Public Policy Uncertainty ... 14
* Consumer Credit Market Uncertainty ... 15
Figures:
Figure 1. Percentage of Households Reporting Lost Income and Significantly Less Financial Security Since COVID-19 Crisis ... 3
Figure 2. Total Household Debt and Its Composition ... 5
Figure 3. Percentage of Delinquent Loans (30+ Days Late) by Loan Type ... 6
Figure 4. Weekly Share of Mortgage Loans in Forbearance ... 8
Contacts:
Author Information ... 18
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Introduction
The Coronavirus Disease 2019 (COVID-19) pandemic/1 has had a large and persistent economic impact across the United States./2
Fear of infection, social distancing, and stay-at-home orders prompted business closures and a severe decline in demand for travel, accommodations, restaurants, and entertainment, among other industries. This led to a significant reduction in employment and a loss of income in many U.S. households. However, consumers have generally not fallen delinquent on their loan obligations, such as mortgages, credit cards, auto loans, and student loans. This pattern is unlike that of other economic recessions, such as the Great Recession caused by the 2007-2009 financial crisis.
Many consumers having trouble paying their bills have received loan forbearance./3
Loan forbearance plans are agreements between borrowers and lenders that allow borrowers to reduce or suspend payments for a short period of time, providing extended time for borrowers to become current on their payments and repay the amounts owed to the lenders. These plans do not forgive unpaid loan payments and tend to be appropriate for borrowers experiencing temporary hardship./4
In addition, many consumers who lost income received direct support from the government, which may have helped them pay their bills.
Policy responses to the economic impacts of the COVID-19 pandemic have likely prevented many consumers from falling delinquent on their loans. Specifically, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which was signed into law on March 27, 2020, granted forbearance for many types of mortgages (Section 4022) and for most federal student loans (Section 3513)./5
In addition to this legislative response, financial regulatory agencies have responded to the COVID-19 pandemic using existing statutory authorities to encourage loan forbearance and other financial relief options for affected consumers./6
Since the COVID-19 pandemic began, many banks and credit unions have announced measures to offer various forms of assistance to affected consumers.
The CARES Act also provided fiscal relief, which was likely another important factor making it easier for consumers to pay their existing loan obligations. These actions included direct income support in the form of enhanced unemployment insurance and relief checks phased out for higher-income taxpayers (called Economic Impact Payments), among other things./7
These income transfer programs may have helped some consumers stay current on their consumer credit payments, particularly those who have lost income during the COVID-19 pandemic.
This report explores household debt since the COVID-19 pandemic began. First, it describes the effects the pandemic has had on unemployment and income losses, followed by a discussion of observed trends in household debt and delinquencies. Then, the report highlights two important policy impacts that influenced these trends: consumer loan forbearance and macroeconomic policy to support households during the economic recession. Lastly, the report discusses the uncertain outlook for household finances and consumer debt markets.
Household Income During the COVID-19 Pandemic
The spread of COVID-19 and the ensuing public health crisis resulted in a dramatic increase in unemployment, which peaked at 14.7% in April and has since fallen to 7.9% in September./8
These rates are the highest since the Great Depression and are worse than the peak unemployment rate during the 2007-2009 Great Recession over a decade ago./9
Consequently, many Americans have lost income and faced financial hardship due to the impact of the pandemic./10
Survey results suggest that since March 2020, half of all adults live in a household that has lost some employment income./11
Figure 1 shows select results from the Federal Reserve Bank of Philadelphia's COVID-19 Survey of Consumers, an online survey conducted to gather information from respondents about income, employment, and financial security during the COVID-19 pandemic. So far, the survey has been administered in four waves during April, May, June, and July 2020. In the first wave of the survey, conducted in April, 39.2% of respondents indicated a reduction in personal income, or no income, as a result of the pandemic./12
Waves 2, 3, and 4 saw some improvements to personal income loss as the percentage of respondents reporting a reduction in personal income, or no income, decreased to 35.8%, 32.7%, and 32.1%, respectively./13
This loss of income may be a large unexpected financial event for many families, and research suggests that many families may not have much emergency savings. For example, a 2019 Federal Reserve survey, before the COVID-19 pandemic, found that 37% of families reported not being able to cover a $400 emergency expense with savings or the equivalent./14
Therefore, this employment income loss has led some Americans to feel more insecure about their financial situation. When asked how the COVID-19 crisis affected their concern about their ability to make ends meet over the next 12 months, 27.8% of respondents in April indicated feeling significantly less secure than they did prior to the crisis; see Figure 1./15
Responses to this question about financial security showed improvement in subsequent waves. The percentage of respondents reporting significant concern about their ability to make ends meet over the next 12 months decreased from 20.4% in May down to 14.6% in June. However, this percentage increased to 15.6% in July, indicating a slight reversal in the downward trend and an increased concern among respondents about their ability to make ends meet in the next 12 months./16
Figure 1. Percentage of Households Reporting Lost Income and Significantly Less Financial Security Since COVID-19 Crisis
Figure omitted.
The income loss from the COVID-19 pandemic may impact the ability of some families to pay their loan obligations or other bills. Late loan payments can harm an individual's credit score, which could reduce their access to credit in the future. Severe delinquency can also eventually lead to more serious consequences, such as debt collection, foreclosure, car repossession, or wage garnishment. For this reason, many policymakers are interested in understanding the impact of COVID-19 pandemic income losses on household debt and delinquency.
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Content omitted.
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Future Household Finance Outlook
During the summer of 2020, some industry reports described declines in consumer loan forbearance requests in mortgage, auto, credit card, and other consumer credit markets./58
However, it is unclear whether this pattern will continue. Future economic projections look uncertain, as it is difficult to predict the trajectory of future COVID-19 outbreaks and their subsequent economic impacts. This section of the report discusses major uncertainties relating to the outlook for household debt and consumer credit markets. The first subsection describes current macroeconomic uncertainties; the second subsection discusses the importance of future public policy; and the last subsection discusses uncertainties in consumer credit markets.
Future Macroeconomic Outlook Uncertainty
The path of economic recovery from the COVID-19 pandemic is highly uncertain. The economic outlook is largely being driven by a public health crisis that is, in and of itself, difficult to predict.
To a large extent, the economy is unlikely to fully recover until the pandemic has ended. Fears of the virus and social distancing measures make it unlikely that commerce can regain its prepandemic pace while COVID-19 still poses a threat. Workers in certain industries, such as retail, restaurant, and travel, may not recover their jobs until local health regulations allow normal operations and consumers demand these services again. Therefore, economic activity may depend on factors such as when a vaccine will be readily available or advances in treatment. In this case, forecasting when employment will recover may be difficult. Yet current projections suggest possible long-run economic impacts. The Congressional Budget Office (CBO) forecasts, as of July 2020, that both real gross domestic product will remain below its potential and the unemployment rate will remain above the 2019 rate for the remainder of the decade (i.e., through 2030)./59
The forecast assumes no policy changes and is subject to change. Other forecasts are more optimistic about the rate of recovery, although they also suggest that the effects of COVID-19 on unemployment may be long lasting./60
Future Public Policy Uncertainty
Future public policy will affect the course of the economic recovery generally and developments in household debt markets more specifically. Mortgage and student loan forbearance programs are still in effect, but when these programs expire, some consumers may fall delinquent on their loans. In addition, the July expiration of the CARES Act's supplemental unemployment insurance payments could also result in more consumers eventually being unable to stay current on their loans. President Trump's memorandum extends a lower supplemental payment for some unemployed workers, but reports suggest that these supplemental payments started to expire as of the end of August in some states./61
A recent research study suggests that in August, without the benefit supplement, many unemployed workers may have depleted their savings and reduced their spending./62
Some families losing unemployment insurance funds may have more trouble paying their monthly consumer loan obligations with a reduced benefit./63
Industry reports suggest concerns about future delinquencies or defaults on consumer loans without additional government stimulus, such as unemployment aid./64
CBO stated that "if the additional $600 per week was extended ... the extension would allow people to make more payments on loans and therefore have greater access to credit in the future than they would have otherwise."/65
Congress is currently debating whether COVID-19 pandemic relief provisions should be extended or whether the cost of these proposals outweigh their benefits./66
Active legislation that would modify, extend, or create new stimulus programs includes
* the Heroes Act (first version: H.R. 6800; second version: H.R. 925) in the House, which first passed on May 15, 2020, then again on October 1, 2020; and
* the American Workers, Families, and Employers Assistance Act (S. 4318) in the Senate, which was introduced on July 27, 2020.
Both bills include additional relief payments to individuals/67 and additional unemployment insurance benefits./68
In addition, the Heroes Act would expand consumer rights to loan forbearance and other payment relief during the COVID-19 pandemic./69
Consumer Credit Market Uncertainty
Promoting loan forbearance as a solution for consumers having trouble meeting their loan obligations made sense when the COVID-19 pandemic was expected to be short-lived. However, if the economic impacts of the COVID-19 pandemic persist for a longer period of time, then loan forbearance may only be delaying consumers from becoming delinquent and defaulting on their loans, rather than preventing this outcome. If so, consumers may not be able to avoid the serious consequences of loan default, such as debt collection, foreclosure, car repossession, or wage garnishment.
For lenders, if the economic impacts of the COVID-19 pandemic continue to cause prolonged disruptions and the CARES Act rights to loan forbearance expire, lenders may find that voluntarily extending loan forbearance becomes a less viable option. Questions exist about whether deferrals will become current or whether they will eventually need to be charged off./70
Large numbers of missed consumer loan payments--due to forbearance or delinquency--could have significant negative consequences for financial institutions and the financial system that affects the future availability of credit./71
It is unclear, however, if the share of household debt at risk of default may be enough to pose systemic risk to the financial system./72
In addition to impacts on current loans, CARES Act protections related to the credit reporting system may also impact consumers' ability to access credit in the future, possibly in positive and negative ways. Consumers can harm their credit scores when they miss consumer loan payments, and lower credit scores can impact their access to future credit./73
Section 4021 of the CARES Act requires financial institutions to report to the credit bureaus that consumers are current on their credit obligations if they enter into an agreement to defer, forbear, modify, make partial payments, or get any other assistance on their loan payments from a financial institution and fulfill those requirements./74
Before this law was enacted, lenders could choose whether to report loans in forbearance as paid on time; with this law, the option is no longer voluntary for the lender./75
Although this CARES Act protection allows consumers with loan forbearance agreements to protect their on-time credit histories, the provision may also lead to some unintended consequences./76
Financial institutions may find credit scores less predictive of whether a consumer is currently creditworthy, in part due to deferrals being treated the same as on-time payments./77
This situation could make it more difficult for consumers to access new credit, particularly those currently meeting their loan obligations./78
So far, most of the response to the COVID-19 pandemic in consumer debt markets has focused on helping consumers make existing debt payments, rather than focusing on access to credit, as the pandemic is ongoing. Evidence suggests that credit markets have already tightened and it may be more difficult for consumers to access new credit now than before the pandemic. According to the CFPB, new credit applications dropped dramatically between the first and last weeks of March 2020, as "auto loan inquiries dropped by 52 percent ... new mortgage inquiries dropped by 27 percent, and revolving credit card inquiries declined by 40 percent."/79
According to the Federal Reserve's senior loan officer survey in July, banks tightened credit standards for all types of household lending, including mortgages, credit cards, and auto loans./80
Therefore, consumers may have needed higher credit scores, larger down payments, or other more stringent requirements to qualify for new credit. In addition, in the credit card market, although evidence suggests limited reductions in credit card limits, the COVID-19 pandemic has likely led to more credit card account closures and fewer credit-limit increases./81
While some creditors may be tightening standards across the board over concerns that mandatory credit reporting provisions may result in inaccurate assessments of credit risk,/82 others argue that broader macroeconomic uncertainties may be driving this trend./83
For example, some lenders may be reluctant to make new loans given that many borrowers could still be vulnerable to potential job losses and need future forbearance, which generates costs for lenders. If limited access to credit continues, it could make it more difficult for consumers to buy homes, cars, or other large purchases, harming the economic recovery.
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REPORT, FIGURES and FOOTNOTES: https://crsreports.congress.gov/product/pdf/R/R46578
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