Did the furlough scheme and mortgage holidays prevent mortgage default?
SFIC member, Danny McGowan, and Christoph Gortz have been awarded an UKRI/ESRC Covid-19 Research Grant entitled “Did the furlough scheme and mortgage holidays prevent mortgage default?"
The COVID-19 crisis has inflicted serious financial hardship upon UK households. By May 2020 14% of borrowers were behind on their mortgage payments. To mitigate the economic damage, the government introduced unprecedented economic policies that provide income and job protection support. We investigate to what extent the Coronavirus Job Retention Scheme (furlough) and the mortgage holiday (MH) policy introduced by banks reduced the incidence of mortgage default during the crisis.
By safeguarding jobs and subsidizing a worker’s monthly wages, the furlough scheme may allow distressed borrowers to avoid default and continue making monthly mortgage payments. MHs may directly lower the incidence of default by deferring repayment until a later date. However, their limited duration may constrain the policy’s effectiveness and shift the timing of default to the future. We develop a model of mortgage default that incorporates both policies. Using the model, state-of-the-art macroeconomic methods, and household survey data collected since April 2020 by the Understanding Society database, we quantify how many defaults the policies prevented. We do so at the national and regional levels because the economic impact of the pandemic has impacted UK regions to varying degrees.
Furthermore, we study whether the policies have different effects according to a borrower’s age, ethnicity and income which influence savings and a person’s ability to withstand an income and employment shock. Our research helps understand the effectiveness of the furlough and MH policies, and provides guidance to tailor and optimize their future design.