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Reducing Strategic Forbearance under the CARES Act: an Experimental Approach Utilizing Recourse Attestation

Author

Listed:
  • Jackson T. Anderson

    (Claremont McKenna College)

  • David M. Harrison

    (University of Central Florida)

  • Michael J. Seiler

    (The College of William & Mary, Raymond A. Mason College of Business)

Abstract

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in response to both the global pandemic’s immediate negative and expected long-lasting impacts on the economy. Under the Act, mortgage borrowers are allowed to cease making payments if their income was negatively impacted by Covid-19. Importantly, borrowers were not required to demonstrate proof of impaction, either currently or retrospectively. Exploring the economic implications of this policy, this study uses an experimental design to first identify strategic forbearance incidence, and then to quantify where the forborne mortgage payment dollars were spent. Our results suggest strategic mortgage forbearance can be significantly reduced, saving taxpayers billions of dollars in potential losses, simply by requiring a 1-page attestation with lender recourse for borrowers wishing to engage in COVID-19 related mortgage payment cessation programs. Additionally, we demonstrate the use of these forborne mortgage payments range from enhancing the financial safety net for distressed borrowers by increasing precautionary savings, to buying necessities, to equity investing and debt consolidation.

Suggested Citation

  • Jackson T. Anderson & David M. Harrison & Michael J. Seiler, 2022. "Reducing Strategic Forbearance under the CARES Act: an Experimental Approach Utilizing Recourse Attestation," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 230-260, August.
    • Handle: RePEc:kap:jrefec:v:65:y:2022:i:2:d:10.1007_s11146-021-09842-4
    DOI: 10.1007/s11146-021-09842-4
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    More about this item

    Keywords

    CARES act; COVID-19; Strategic mortgage forbearance; Experiment;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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