<p data-start="54" data-end="940">Researchers from the European Central Bank (ECB), Duke University, Nova School of Business and Economics, and Católica Lisbon School of Business and Economics, examine the effects of mortgage forbearance during the COVID-19 crisis. Using transaction-level data from a major Portuguese bank, the study explores how households reacted to temporary mortgage payment suspensions. Debt forbearance, which allowed borrowers to delay mortgage payments, was a critical policy tool aimed at preventing financial distress and stabilizing economies. However, due to information gaps, many ineligible households benefited while some eligible ones opted out. The researchers analyze which households entered forbearance, how they used the extra liquidity, and what this means for future economic policies.</p><h3 data-start="942" data-end="983">Who Benefited from Debt Relief?</h3><p data-start="985" data-end="1839">The study finds that households that accessed forbearance were financially more fragile than those who did not. These households had lower incomes, higher debt burdens, and limited savings even before the pandemic. While the program was meant to assist those facing income losses due to the crisis, many eligible households chose not to participate, whereas a significant number of ineligible households took advantage of the program. This raises concerns about the program’s design and its ability to target the most financially vulnerable. Instead of pandemic-induced income shocks, pre-existing financial fragility was the strongest predictor of whether a household entered forbearance. This suggests that many struggling households used the program as a safety net rather than as a response to direct pandemic-related hardships.</p><h3 data-start="1841" data-end="1902">Spending vs. Saving: How Households Used the Relief</h3><p data-start="1904" data-end="2583">The study reveals contrasting spending and saving behaviors among households in forbearance. On average, 15 cents per euro of deferred mortgage payments were spent within the first year, increasing to 22 cents in the long term. Households with lower liquid wealth and income had a higher marginal propensity to consume (MPC), spending about 30 cents per euro deferred. Surprisingly, ineligible households who accessed forbearance spent more of their deferred payments (18 cents per euro) than eligible ones (7 cents per euro). This suggests that forbearance had a greater stimulus effect on financially fragile but technically ineligible households.</p><p data-start="2585" data-end="3297">Beyond consumption, forbearance also led to an increase in household savings. Households saved 35 cents per euro deferred in the short term, which later stabilized at 23 cents. This suggests that while forbearance provided liquidity relief, many households used it as a precautionary buffer rather than solely for immediate spending. However, the liquidity relief was not primarily used to pay off other debts. Households in forbearance reduced their credit card and unsecured debt only by about 4 cents per euro of postponed mortgage payments, contradicting theories that financially constrained households would prioritize reducing high-interest debts when given additional liquidity.</p><h3 data-start="3299" data-end="3366">The Post-Forbearance Struggle: Debt and Spending Behavior</h3><p data-start="3368" data-end="3910">When forbearance ended, many households struggled to adjust their spending downward, raising concerns about long-term financial stability. Households that increased consumption during forbearance continued spending at elevated levels even after mortgage payments resumed, suggesting that temporary relief created long-term adjustment frictions. This aligns with economic research showing that sudden liquidity injections often result in persistent changes in spending behavior, making future financial adjustments difficult.</p><p data-start="3912" data-end="4326">Some banks offered additional relief measures beyond the government-mandated forbearance period, but only around 7% of borrowers opted for further assistance. The study indicates that these additional relief measures were taken up mostly by those who had saved more during forbearance rather than those who had increased their spending, further emphasizing the divide in household financial behavior.</p><h3 data-start="4328" data-end="4373">What This Means for Future Policies</h3><p data-start="4375" data-end="4932">The study provides crucial insights for policymakers designing debt relief programs. While broad-based forbearance provided essential liquidity support and prevented financial distress, it also resulted in many unintended beneficiaries. Future debt relief programs must balance accessibility with targeted support to ensure that aid reaches those in genuine financial distress. Using observable household characteristics, such as income, liquid assets, and debt-to-income ratios, could improve the effectiveness of relief programs.</p><p data-start="4934" data-end="5268">Additionally, while liquidity support can stimulate short-term consumption, its long-term effects on financial stability need careful consideration. Households that increase their spending beyond sustainable levels during forbearance may struggle to adjust once payments resume, leading to future financial hardship.</p><p data-start="5270" data-end="5859">This research contributes to ongoing debates on the optimal design of economic relief programs by highlighting how different households respond to temporary liquidity shocks. The Portuguese forbearance program, similar to other European initiatives and the U.S. CARES Act, reveals key trade-offs between inclusivity and efficiency in financial policy interventions. While strict targeting might exclude some of the most financially vulnerable households, overly broad access can dilute the program’s intended impact and create long-term financial distortions.</p><h3 data-start="5861" data-end="5909">Striking the Right Balance</h3><p data-start="5911" data-end="6331">The study provides compelling evidence that mortgage forbearance was an effective short-term relief tool during the COVID-19 crisis, but it had mixed effects on financial stability and economic recovery. By analyzing household-level data, the research sheds light on how different groups use liquidity relief, offering valuable insights for the design of future economic stabilization policies.</p><p data-start="6333" data-end="6869" data-is-last-node="" data-is-only-node="">While broad-based debt relief can provide immediate support and stimulate demand, it must be carefully structured to prevent unintended long-term financial vulnerabilities. The key challenge for policymakers is ensuring that such interventions are both effective in providing relief and sustainable in preventing excessive household indebtedness. Future relief programs should focus not just on immediate financial stabilization, but also on ensuring long-term resilience among financially vulnerable households.</p>
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