The much-needed financial relief that helped many people weather the pandemic could have unintended longer-term consequences for households and add potential risk to financial markets, according to Treasury Department researchers.
Most people who received forbearance on their mortgages or other debt accommodations like rent and student loan moratoriums have resumed or will soon resume scheduled payments as these government relief programs expire. How those households will fare when they have to come up with the funds to make payments is unclear, the Treasury's Office of Financial Research, which regularly assesses threats to financial stability, said in its annual report to Congress on Wednesday.
Because the deferred payments piled up, many people may wind up with even higher debt levels than they had before the pandemic began.
The experience of people who have already reached the end of their deferral periods provides an example, according to the OFR, which said in its report that “delinquency rates were elevated for borrowers that cycled out of private forbearance programs during the latter half of 2020. There are long-term consequences as well on how these households will fare in managing their overall debt.”
The level and type of household debt also pose some degree of credit risk to the economy. The OFR report noted an increase in riskier types of debt, including loans held by nonbank financial institutions like insurance companies, broker-dealers, and loan companies, which tend to issue credit to people with lower credit scores.
"This reallocation of riskier household credit exposures to nonbank financial institutions is a source of concern as these types of institutions are not subject to the same level of regulatory oversight as banks,“ the OFR said.
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