Avoiding Mortgage Loans Helps Small Business Owners and Low-Income Households – New York Fed Study



People walk in masks outside the Federal Reserve Bank of New York in New York, USA, March 18, 2020 REUTERS / Lucas Jackson / File Photo

According to a study published by the Federal Reserve Bank of New York, giving up mortgages was a lifesaver for low-income homeowners and business owners struggling during the pandemic, giving them the ability to stay in their homes and keep up with other debt payments. on Wednesday.

The end of this support could lead to an increase in mortgage defaults for many households still paying, including low-income households and people who delayed payments before the pandemic, the researchers said.

“Whether this tolerance will simply prevent future troubles for stressed business owners, or whether the post-pandemic economy will help owners make up for lost months remains to be seen,” the researchers wrote in a series of articles. Blog posts released Wednesday.

The share of tolerant borrowers rose sharply to more than 7% in the first months of the pandemic, but many homeowners pulled out of the program by the summer, and by the end of March 2021 the grace period remained just over 4%. The core group of borrowers, mainly people from low-income areas and those with loans insured by the Federal Housing Administration, remained patient for a long period of time.

Small business owners also actively participated in the program: by May 2020, 11% showed patience, and by March 2021, this share had dropped to about 5%. People who own service businesses that have been disproportionately affected by the constraints associated with the pandemic. , has shown patience at higher rates.

Business owners are more likely to use equity capital in their homes through lines of credit, according to the New York Fed.

The program, rolled out under the CARES Act, allowed homeowners to skip up to 12 months of mortgage payments if they faced financial hardship due to COVID-19. Some agencies have extended the time limit to 18 months.

The delay in mortgage payments has provided a period of financial respite for job-hit households as much of the economy has come to a halt in an attempt to stop the virus.

Consumers repaid their credit cards at the fastest pace in two decades during the pandemic, and the mortgage deferral has helped. The typical household with a mortgage deferral has cut its credit card debt by $ 2,100 over the past year, compared with $ 900 for unbearable borrowers.

During the pandemic, borrowers’ credit scores even rose by an average of 14 points, which is more than the 7-point average for people who have never shown tolerance.

But many households continued to struggle with other debts. Non-housing debt delinquencies, including car loans and credit cards, temporarily stabilized after March 2020, but then began to rise again.

It remains to be seen how households still in tolerance will cope when the program ends, the researchers said, but delinquencies could rise because these borrowers have lower payment rates than those who left the program faster. The report indicates that about 40% of borrowers who were 90 days overdue before the mortgage pandemic still did not pay abstinence in March 2021.

However, it is unlikely that delinquencies will rise to levels seen during the Great Recession, when more than 6% of mortgages were 90 days or more delinquent, they said. Instead, the researchers said the serious delinquency rate could rise to around 3.8% if all patient borrowers become delinquent, higher than the 1.3% pre-pandemic level.

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