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Forbearance

Forbearance is the deliberate restraint from exercising a legal, moral, or personal right, particularly in response to provocation, offense, or entitlement, manifesting as patient endurance and self-control rather than impulsive reaction.^[1] In ethical and philosophical contexts, it entails forswearing vengeful attitudes like resentment or bitterness toward wrongdoers, thereby facilitating reconciliation over retaliation.^[1]^[2] Religiously, forbearance exemplifies divine patience, as in Christian theology where it describes God's postponement of judgment on sin to allow repentance, serving as a human virtue for tolerating others' faults without reciprocal harm.^[3]^[4] This endurance counters natural inclinations toward anger, promoting long-term harmony through regulated emotional responses amid disagreement or adversity.^[5] In legal terms, it specifically denotes a creditor's voluntary abstention from demanding payment or enforcement of an obligation, often formalized in agreements to avert immediate default proceedings.^[6]^[7] Beyond individual morality, forbearance appears in political and administrative practice as intentional, revocable non-enforcement of statutes, enabling officials to prioritize pragmatic outcomes over strict application, such as in regulatory discretion or debt relief during crises.^[8]^[9] While praised for averting escalation and fostering stability, critics note risks of selective application undermining rule consistency.^[10]

Definition and Conceptual Foundations

Core Definition and Etymology

Forbearance, in legal and financial contexts, constitutes the deliberate abstention by a creditor from enforcing the immediate repayment of a debt or performance of a contractual obligation, often granting the debtor a temporary period to address financial hardship without triggering default, foreclosure, or other remedies.^[11] This arrangement typically postpones or reduces payments—such as pausing monthly installments on mortgages or student loans—while the underlying debt principal and accrued interest remain due, distinguishing it from forgiveness or permanent modification.^[12] ^[13] Lenders may extend forbearance voluntarily or under regulatory mandates, as seen in responses to economic crises, but it does not eliminate the borrower's ultimate repayment responsibility.^[14] The noun "forbearance" emerged in the mid-16th century from the verb "forbear," combining the Old English prefix "for-" (indicating negation or removal) with "beran" (to bear or endure), yielding "forberan" to mean refraining from action, abstaining, or patiently tolerating.^[15] By the 1570s, it had acquired a specialized legal connotation of intentional delay in debt collection or contract enforcement, evolving from earlier senses of self-restraint to emphasize creditor leniency in commercial transactions.^[16] This etymological root underscores forbearance's essence as an active withholding of enforcement rather than passive inaction, aligning with its application in modern debt relief mechanisms.^[7]

Legal and Ethical Dimensions

In legal contexts, forbearance refers to the intentional abstention from enforcing a right, such as delaying the collection of a debt or the demand for contractual performance, often for a defined period.^[6] ^[17] This practice is enshrined in common law traditions, where creditors may voluntarily postpone remedies like foreclosure or litigation to allow debtors time to cure defaults, provided such agreements do not waive underlying obligations.^[18] Forbearance agreements typically outline conditions for resumption of enforcement, preserving the lender's rights while averting immediate distress sales or bankruptcies.^[19] Within contract law, forbearance functions as valid consideration, constituting a bargained-for exchange where one party promises to refrain from exercising a legitimate legal right in return for a counter-promise or performance.^[20] Courts recognize forbearance of a doubtful or colorable claim—rather than a frivolous one—as sufficient detriment to support enforceability, ensuring contracts reflect mutual concessions rather than gratuitous indulgences.^[21] This principle underpins debt restructuring, where a lender's commitment to forbear from suit enables borrowers to negotiate repayment plans, though failure to comply revives original remedies.^[22] Ethically, forbearance embodies a tension between retributive justice, which demands enforcement of contractual duties, and consequentialist mercy, which prioritizes harm reduction for vulnerable parties.^[23] In lending, it mitigates immediate suffering from defaults but risks moral hazard, as evidenced by analyses of pandemic-era programs where some able-to-pay borrowers strategically entered forbearance, increasing perceived immorality unless tied to upfront costs like fees.^[24] ^[25] Government-mandated forbearance, such as under the CARES Act, amplified this by pausing payments without income verification, leading to elevated private debt accumulation and delinquency forecasts post-relief, as borrowers anticipated leniency over repayment. ^[26] Philosophically, forbearance parallels punishment-forbearance theories of forgiveness, where withholding sanctions preserves relational equity only if revocable and not absolute, avoiding incentives for repeated breaches.^[27] Empirical data from student and mortgage relief underscore that untargeted forbearance erodes fairness by subsidizing non-distressed actors at the expense of prudent payers and taxpayers.^[28] ^[29]

Historical Evolution

Early Legal Precedents

In English common law during the 16th century, forbearance from enforcing a debt emerged as a form of consideration in assumpsit actions, allowing creditors to secure promises in exchange for delaying suit and avoiding procedural risks like wager of law.^[30] This required a tangible detriment to the creditor, such as forbearance exceeding "an hour or less," to distinguish it from inconsequential delays.^[30] Slade's Case (1602) further solidified assumpsit's role in enforcing such arrangements by extending it to debts and executed considerations, facilitating forbearance-based modifications to obligations.^[30] Early precedents emphasized the need for the forbearance to be requested by the debtor and involve an enforceable right. In Lutwich v. Hussey (1583), courts invalidated vague or minimal delays as insufficient consideration for a promise.^[30] Whorwood v. Gybbons (1587) upheld forbearance for a specified "per parvum tempus" period as valid if performed as requested, while May v. Alvares (1594) recognized a six-month forbearance implied by the agreement's terms.^[30] Stone v. Wythipol (1593) clarified that forbearance lacked value absent a legitimate underlying claim, such as an infant's unenforceable debt.^[30] By the 17th century, the doctrine matured to accept even brief forbearance if tied to the debtor's request. Cooks v. Douze (1632) treated "per paululum tempus" delays as consideration when promised and executed, and Harris v. Richards (1632) affirmed sufficiency regardless of direct benefit to the promisor, focusing on the promisee's detriment.^[30] Regarding forbearance to prosecute claims, 19th-century cases refined distinctions between valid and dubious rights. Early rulings, like Jones v. Ashburnham (1804), rejected forbearance from unfounded claims as non-detrimental.^[31] Alliance Bank v. Broom (1864) established that a creditor's forbearance from immediate debt enforcement provided consideration for guarantees or securities.^[30] Callisher v. Bischoffsheim (1870) extended validity to honestly asserted claims, even if groundless, provided they were reasonable and non-vexatious, shifting from strict validity requirements.^[31] Miles v. New Zealand Alford Estate Co. (1886) reinforced this for "serious" claims pursued in good faith.^[30] These precedents laid the groundwork for forbearance in debt restructuring, prioritizing requested restraint over absolute claim merit.^[30]^[31]

20th-Century Developments in Finance

During the Great Depression, financial forbearance emerged as a critical mechanism to address widespread mortgage distress, particularly through New Deal legislation targeting farm and home loans. The Emergency Farm Mortgage Act of May 12, 1933, empowered Federal Land Banks and the newly created Land Bank Commissioner to offer relief on approximately 1.1 million farm loans totaling $2.9 billion, representing about 40% of outstanding farm debt; this included principal forbearance for up to three years, interest rate reductions to as low as 3.5%, and extended repayment terms up to 36 years for Federal Land Bank loans.^[32] These measures reduced delinquency rates to 20-30% in the late 1930s and limited foreclosures to 9-11% of loan value, though they incurred Treasury costs equivalent to about 6.5% of assets.^[32] For residential mortgages, the Home Owners' Loan Corporation (HOLC), established on June 13, 1933, refinanced over one million distressed loans by purchasing them from lenders and issuing longer-term bonds with reduced principal, lower interest rates (around 5%), and deferred payments, effectively halting foreclosures and stabilizing housing markets.^[33] Complementing government efforts, private Building and Loan associations—precursors to modern savings and loans—employed contractual forbearance, allowing borrowers flexible repayment schedules and payment delays without formal defaults, which resulted in significantly lower foreclosure rates compared to other lenders during the crisis.^[34] This dual approach of direct government intervention ("big pockets" via HOLC) and private contractual flexibility ("forbearance on the cheap" via associations) marked a shift toward structured debt relief as a tool for financial stability, influencing subsequent lending practices.^[35] In the 1980s Savings and Loan crisis, forbearance took a regulatory form, as federal authorities permitted hundreds of insolvent institutions to continue operations despite capital shortfalls, driven by high interest rates and risky investments that eroded thrift assets.^[36] This policy delayed closures for over 1,000 failing S&Ls between 1980 and 1994, aiming to avert immediate systemic collapse but ultimately amplifying taxpayer costs to tens of billions by allowing losses to compound through moral hazard and continued lending.^[37] Such regulatory leniency highlighted risks of prolonged forbearance, prompting reforms like the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which curtailed such practices and enhanced supervisory promptness.^[38]

Post-2008 Financial Crisis Expansion

Following the 2008 financial crisis, which saw U.S. foreclosure starts peak at over 2.8 million in 2009, federal initiatives expanded forbearance as a key loss mitigation tool to stem widespread defaults on residential mortgages. In February 2009, the Obama administration announced the Making Home Affordable (MHA) program under the Troubled Asset Relief Program (TARP), incorporating forbearance options to provide temporary payment relief before pursuing permanent modifications.^[39] The Home Affordable Modification Program (HAMP), launched on March 4, 2009, required a three-month trial period of reduced payments—functioning as short-term forbearance—for eligible borrowers, with over 1.8 million homeowners entering trials by 2016.^[40] Additionally, the 2010 Home Affordable Unemployment Program (HAUP) extended up to 12 months of forbearance for borrowers unemployed due to economic conditions, targeting recession-impacted households without requiring immediate repayment catch-up. Regulatory agencies further institutionalized forbearance through interagency guidance. In December 2008, the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and other regulators issued statements urging banks to work with distressed borrowers via modifications, including forbearance, to avoid unnecessary foreclosures on performing loans. This built on troubled debt restructuring (TDR) frameworks under accounting standards (ASC 310-40), where forbearance concessions to economically troubled debtors became more prevalent, with FDIC data showing TDR balances in community banks rising from $10 billion in 2008 to over $40 billion by 2010.^[41] Such practices allowed servicers to suspend or reduce payments temporarily while classifying loans as restructured rather than nonperforming, though critics argued this masked underlying credit risks. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 catalyzed longer-term expansion by establishing the Consumer Financial Protection Bureau (CFPB), which in 2013 finalized mortgage servicing rules under Regulation X (implementing aspects of the Real Estate Settlement Procedures Act). These mandated servicers of federally related mortgages to assess borrowers for available loss mitigation, positioning forbearance as an early option in a sequential "waterfall" process before foreclosure initiation, applicable to loans originated after January 2014 but influencing broader practices. By standardizing forbearance—typically 3-12 months with repayment plans or deferrals—the rules addressed pre-crisis servicing failures, where ad hoc relief was inconsistent, though implementation faced challenges from servicer capacity constraints during peak delinquencies exceeding 11% in 2010. This regulatory framework marked a shift from voluntary to obligatory borrower protections, reducing foreclosure inventories by an estimated 1-2 million starts through enhanced relief pathways.

Types and Mechanisms

Mortgage Forbearance

Mortgage forbearance refers to a temporary agreement between a borrower and mortgage servicer allowing the borrower to reduce or suspend mortgage payments due to financial hardship, with the deferred amounts added to the loan balance or repaid later without forgiveness of principal or interest.^[42] Unlike loan forgiveness, forbearance does not alter the total debt owed; instead, missed payments accrue and must be addressed post-forbearance through options such as repayment plans, payment deferrals, or loan modifications.^[13] Eligibility typically requires demonstration of a qualifying hardship, such as unemployment, medical expenses, or income reduction, though servicers retain discretion in approval.^[43] For loans backed by Fannie Mae or Freddie Mac, forbearance is available for owner-occupied properties where the borrower faces an eligible hardship, with initial terms up to six months and possible extensions not exceeding the loan's maturity date for mortgage-backed securities.^[44] Borrowers must contact their servicer to request forbearance, often providing documentation like pay stubs or hardship letters; federally backed loans under programs like those authorized by the CARES Act simplified this during the COVID-19 pandemic by allowing self-attestation of hardship for up to 180 days initially, extendable by another 180 days.^[45] The mechanism involves a written agreement specifying the duration, payment reduction (e.g., interest-only or partial principal), or full pause, during which the servicer may advance payments to investors but can later recover via borrower repayment.^[46] At the forbearance's end, borrowers and servicers negotiate resolution; common paths include a repayment plan spreading missed amounts over 10-12 months atop regular payments, deferral capitalizing arrears to the loan balance for later payoff (e.g., at sale or refinance), or transition to modification if ongoing hardship persists.^[47] Forbearance differs from loan modification, which permanently adjusts terms like interest rates or loan duration to lower ongoing payments, whereas forbearance addresses short-term liquidity without long-term restructuring.^[48] Servicers must comply with federal regulations, including those under Regulation X of the Truth in Lending Act, mandating loss mitigation evaluations before foreclosure and prohibiting negative credit reporting for forbearance participation.^[49] Empirical data from post-2008 and COVID-19 periods indicate forbearance prevents immediate defaults but risks increased delinquencies if unresolved, with Fannie Mae and Freddie Mac reporting over 2 million active forbearance plans at the 2020 peak, declining to under 1% of portfolios by mid-2022 as economies recovered.^[50]

Student Loan Forbearance

Student loan forbearance refers to a temporary suspension or reduction of monthly payments on federal student loans, typically granted when borrowers face financial hardship or other qualifying circumstances that prevent full repayment, though interest continues to accrue on the principal balance during this period.^[51] Unlike deferment, which may subsidize interest on certain loans such as subsidized Direct Loans or Perkins Loans, forbearance requires interest capitalization on all federal loan types, potentially increasing the total debt owed upon resumption of payments.^[52] This mechanism is administered by federal loan servicers under U.S. Department of Education guidelines, primarily for Direct Loans, FFEL Program loans (now limited), and Perkins Loans, but private student loans may offer similar relief at the lender's discretion without federal mandates.^[53] Federal regulations distinguish between general and mandatory forbearance. General forbearance, available for reasons like excessive debt burden relative to income or temporary financial difficulties, can be granted for up to 12 months at a time, with a cumulative limit of three years across the loan's life, requiring borrower documentation and servicer approval.^[54] Mandatory forbearance applies automatically in specific scenarios, such as when a borrower's monthly payment exceeds 20% of disposable income for loans over $30,000 in the Direct Loan program, during medical or dental internships/residencies, or for borrowers qualifying for partial loan forgiveness under programs like Teacher Loan Forgiveness, without needing a formal request but subject to verification.^[55] Borrowers must contact their servicer to initiate either type, providing evidence like income statements or enrollment proofs, and payments resume automatically after the approved period unless extended.^[56] Forbearance gained prominence during the COVID-19 pandemic under the CARES Act of March 27, 2020, which imposed an administrative forbearance on federal loans until September 30, 2020, with 0% interest accrual—a deviation from standard terms extended multiple times through extensions by the Department of Education until the payments resumed in October 2023.^[57] As of October 2025, while the broad pandemic pause has ended, targeted forbearances persist for borrowers affected by legal challenges to income-driven repayment plans like SAVE, placing affected loans in non-payment status with accruing interest starting August 1, 2025, and potentially extending through January 31, 2026, or until court resolutions, impacting millions in repayment.^[58]^[59] These programs underscore forbearance's role as a short-term bridge rather than a long-term solution, as empirical analyses indicate that prolonged use correlates with increased default risks and higher overall indebtedness due to capitalized interest, without substantially altering labor market behaviors like job search durations.^[60]^[61]

Commercial and Other Debt Forbearance

Commercial debt forbearance involves lenders temporarily refraining from exercising remedies against defaulted business borrowers, such as loan acceleration, collateral seizure, or foreclosure, in exchange for borrower commitments to improved repayment terms or additional safeguards.^[62] This mechanism applies primarily to commercial loans, including those for real estate, equipment financing, and working capital, where borrowers encounter short-term cash flow disruptions rather than permanent insolvency.^[63] Unlike outright forgiveness, forbearance typically permits interest to accrue on deferred principal, with payments resuming or restructured afterward, often documented in a formal agreement specifying duration—commonly 3 to 12 months—and conditions like financial reporting or fees.^[64]^[65] In the United States, these arrangements operate under general contract principles and banking oversight from agencies like the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), which classify qualifying modifications as troubled debt restructurings (TDRs) requiring impairment assessments but allowing forbearance to avoid immediate write-downs.^[66] Post-2008 financial crisis, regulators temporarily relaxed provisioning rules for restructured corporate loans, enabling banks to extend forbearance and sustain lending volumes; for instance, European banks with high forbearance shares saw reduced new credit issuance, indicating substitution effects.^[67] Such practices correlated with prolonged survival of marginally viable "zombie" firms, as evidenced by Indian banks' forbearance during the crisis, which delayed resolutions but preserved short-term stability at the cost of $18.5 billion in potential FDIC savings from prompt closures.^[68]^[69] Other debt forbearance encompasses non-commercial, non-mortgage, and non-student obligations, such as personal auto loans or unsecured credit lines, where servicers may grant discretionary pauses amid hardship, though these lack the standardized federal frameworks of consumer programs.^[70] In corporate contexts beyond bank loans, it includes bondholder covenant waivers or supplier trade credit extensions, providing informal relief without altering principal.^[71] During the COVID-19 pandemic, U.S. banks extended forbearance to $17.3 trillion in vulnerable business liabilities by late 2020, prioritizing sectors like hospitality, though smaller nonbank lenders facilitated fewer such arrangements due to liquidity constraints.^[72]^[73] Empirical data from the period showed forbearance stabilizing bank balance sheets temporarily but risking extended non-performing exposures if economic recovery lagged.^[74]

Implementation in the United States

Federal Regulations and Programs

In the United States, federal regulations on forbearance primarily apply to government-backed loans, with oversight from agencies such as the Consumer Financial Protection Bureau (CFPB) for mortgages and the Department of Education for student loans.^[13]^[51] These programs allow temporary suspension or reduction of payments for borrowers facing financial hardship, but interest typically continues to accrue, distinguishing forbearance from deferment.^[53] Regulations mandate that servicers evaluate eligibility based on documented hardship, such as unemployment or medical expenses, without requiring repayment of forborne amounts as a lump sum unless specified.^[75] For federally insured mortgages under the Federal Housing Administration (FHA), servicers must offer special forbearance as a loss mitigation tool for borrowers unable to make full payments due to temporary issues, such as job loss.^[76] This program permits reduced or suspended payments for up to 12 months, extendable in some cases, while the borrower works toward reinstatement or modification; formal agreements exceeding three months require written plans from the servicer.^[77] The CFPB enforces these options through servicing rules under the Real Estate Settlement Procedures Act (RESPA), requiring servicers to proactively assess forbearance before advancing to foreclosure and prohibiting fees during the period.^[13] Federal student loan forbearance, governed by the Higher Education Act and detailed in 34 CFR § 682.211 for Federal Family Education Loan (FFEL) Program loans, includes general, mandatory administrative, and discretionary types available for Direct Loans, FFEL, and Perkins Loans.^[75] General forbearance may be granted for up to 12 months at a time, with a cumulative limit of three years, upon request for hardships like excessive debt burden or illness; mandatory administrative forbearance applies automatically for periods like up to 60 days post-litigation or three years for borrowers at risk of default with high debt-to-income ratios exceeding 20%.^[51]^[78] Servicers must document requests but cannot charge fees beyond accruing interest, and forbearance periods do not qualify as payments toward forgiveness programs like Public Service Loan Forgiveness unless specified otherwise.^[52] The Servicemembers Civil Relief Act (SCRA), a federal statute at 50 U.S.C. §§ 3901–4043, mandates forbearance-like relief for active-duty military personnel on pre-service debts, including caps on interest at 6% and court-ordered stays on enforcement actions.^[79] Creditors must grant deferment or forbearance upon written request with military orders, applicable to mortgages and other obligations, without requiring proof of hardship beyond service status; this extends protections to spouses for joint debts and remains in effect during service plus one year post-discharge.^[80]^[81]

CARES Act and COVID-19 Applications

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, introduced statutory forbearance rights for certain federally backed debts to mitigate financial distress from the COVID-19 pandemic. Section 4022 targeted residential mortgages, while Section 3513 addressed federal student loans, mandating servicers to grant relief upon borrower attestation of hardship without requiring documentation of income loss or other proof.^[82] ^[83] These provisions applied to loans experiencing direct or indirect effects from the emergency, covering approximately 70% of U.S. mortgages through government-sponsored enterprises like Fannie Mae and Freddie Mac, as well as FHA, VA, and USDA loans.^[45] Forbearance paused payments but did not forgive principal or interest, which accrued and was repayable later through options like repayment plans or partial payments added to principal.^[84] Under Section 4022, eligible borrowers could request an initial 180-day forbearance period, extendable once for another 180 days at the servicer's discretion, totaling up to 12 months. Servicers were prohibited from charging late fees, penalties, or extra interest during this time and from reporting negative credit impacts for the forbearance itself.^[85] The program saw peak uptake in mid-2020, with over 7% of mortgages in forbearance by July 2020, disproportionately among lower-income and minority borrowers facing higher unemployment rates.^[86] Empirical data indicate it provided liquidity, reducing delinquency rates; by March 2023, over 90% of exited forbearance loans, including those held by Black and Hispanic borrowers, had returned to current status, averting widespread foreclosures amid a 99% drop in such actions from pre-pandemic levels.^[82] ^[87] However, some borrowers redirected paused payments to savings or other debts rather than solely for hardship relief, suggesting varied usage beyond acute necessity.^[88] For federal student loans disbursed before the pandemic and held by the Department of Education—covering about 92% of outstanding federal aid—Section 3513 imposed an administrative forbearance suspending payments and halting interest accrual from March 13, 2020, through September 30, 2020, with automatic application to avoid borrower action.^[83] This was extended multiple times by executive action, culminating in cessation on August 31, 2023, after which interest resumed and payments were required starting October 1, 2023, for most borrowers.^[89] Unlike standard forbearance, no credit toward forgiveness programs accrued during this period for some plans, though collections on defaulted loans were paused and tax offsets halted.^[90] Participation reached nearly all eligible borrowers due to its mandatory nature, stabilizing household cash flow during peak unemployment but deferring over $1.6 trillion in principal, which analyses show delayed rather than eliminated repayment burdens.^[91] Post-forbearance delinquency rates remained low initially, at under 8% by late 2023, reflecting labor market recovery but highlighting risks of accumulated interest for vulnerable groups.^[92]

International Variations

European Union Frameworks

The European Union's regulatory frameworks for forbearance in credit provision are anchored in prudential banking rules and consumer protection measures, harmonized across member states to address borrower distress while mitigating systemic risks. Under Article 47b of the Capital Requirements Regulation (CRR, Regulation (EU) No 575/2013), a forbearance measure constitutes any concession—such as term extensions, interest rate reductions, or principal deferrals—granted by a credit institution to an obligor facing or anticipated to face difficulties in fulfilling financial obligations, excluding short-term payment holidays under specific conditions. This definition ensures forborne exposures are identified and treated as higher-risk assets, requiring institutions to perform viability assessments and apply elevated capital requirements if the borrower's repayment capacity remains impaired post-concession.^[93] The European Banking Authority (EBA) enforces these through its Guidelines on the management of non-performing exposures (NPEs) and forborne exposures, finalized on 30 January 2019 and applicable to all EU credit institutions. These guidelines mandate early warning systems for detecting potential distress, structured evaluations of borrower sustainability (including stress testing future cash flows), and multi-stage monitoring, with forborne exposures subject to a probation period of at least one year before potential reclassification to performing status.^[94] Institutions must also develop reduction strategies for NPE stocks, including forbearance as a tool, and disclose detailed metrics on forborne portfolios under separate EBA guidelines to enhance transparency and market discipline.^[95] Supervisory reporting standards, via EBA Implementing Technical Standards, further standardize data on forbearance volumes and outcomes to facilitate cross-border oversight.^[96] For consumer-facing debts like mortgages, the Mortgage Credit Directive (MCD, Directive 2014/17/EU) integrates forbearance into arrears management under Article 28, obliging member states to require creditors to pursue reasonable forbearance—such as repayment plan adjustments or temporary suspensions—prior to foreclosure, based on thorough assessments of the borrower's income, expenditures, and circumstances. EBA Guidelines on arrears and foreclosure (EBA/GL/2015/12, amended October 2024) operationalize this by prescribing income verification protocols, documentation retention for at least the loan term, and safeguards against misrepresented financial data, with application dating to the MCD's transposition deadline of 21 March 2016.^[97] These measures apply to residential mortgages and certain consumer credits, emphasizing proactive engagement to avoid unnecessary property repossessions while aligning with broader CRR forbearance classifications.

Practices in Other Jurisdictions

In Canada, mortgage forbearance typically involves temporary payment deferrals granted by lenders to borrowers facing financial hardship, with durations commonly up to six months, as facilitated by the Canada Mortgage and Housing Corporation (CMHC) during periods of economic stress such as the COVID-19 pandemic.^[98] The Office of the Superintendent of Financial Institutions (OSFI) defines forbearance as a concession not otherwise available, emphasizing risk management practices where lenders assess borrower viability before granting relief, often requiring resumed payments post-deferral without added interest capitalization in standard cases.^[99] As of 2024, deferrals remain available through private agreements, but lenders must evaluate long-term affordability to mitigate default risks.^[100] In the United Kingdom, the Financial Conduct Authority (FCA) mandates lenders to offer a spectrum of forbearance options for borrowers in financial difficulty, including payment holidays, reduced payments, or term extensions, with new rules effective from 2024 requiring proactive engagement and assessment of customer circumstances.^[101] Major mortgage lenders, via the Mortgage Charter introduced in 2023, provide up to 12 months of forbearance without negative credit reporting during active support, aiming to prevent arrears escalation amid rising interest rates.^[102] These measures build on post-2008 prudential reviews, where firms were directed to enhance impairment provisions and forbearance processes to ensure concessions reflect genuine hardship rather than masking underlying credit issues.^[103] Australia's framework emphasizes responsible lending under the National Consumer Credit Protection Act, where creditors must respond to hardship requests within 21-30 days, potentially offering forbearance through repayment variations, interest-only periods, or temporary pauses on loans including mortgages.^[104] Forbearance is positioned as a short-term tool for financial distress, with lenders required to verify eligibility without automatic waivers, and no government-mandated deferral caps akin to crisis responses elsewhere; instead, outcomes depend on bilateral agreements that prioritize creditor recovery.^[105] In practice, this has supported borrowers during economic downturns, though critics note variability in application across institutions, lacking the standardized federal oversight seen in Canada.^[106]

Benefits and Empirical Outcomes

Short-Term Relief Effects

Forbearance programs, particularly those enacted under the CARES Act in March 2020, provided immediate liquidity relief to borrowers by suspending required payments on federally backed mortgages, allowing eligible homeowners to pause obligations for up to 18 months without accruing penalties or negative credit reporting.^[107] This pause enabled households to redirect funds toward essential expenditures, with empirical analysis showing that a 1 percentage point increase in the forbearance share of mortgages correlated with a 30 basis point rise in monthly employment rates, suggesting short-term stabilization of labor market participation amid pandemic-induced income shocks.^[91] Similarly, forbearance uptake reduced immediate delinquency rates, as single borrowers electing the option were more likely to avoid default or exit delinquency compared to non-participants.^[108] In the student loan sector, the administrative forbearance initiated in March 2020 halted payments and interest accrual for approximately 42 million borrowers, freeing an average of $280 monthly per borrower in active repayment and injecting roughly $13,500 per person over the initial period.^[109] This relief boosted short-term consumption of both durable and non-durable goods, as evidenced by increased spending patterns among affected households, while averting a projected surge in defaults that could have amplified broader economic distress.^[110] Targeted programs also mitigated financial stress by lowering overdraft incidences and supporting investment activities, with borrowers exhibiting reduced precautionary saving behaviors during the pause.^[111] Across debt types, including commercial obligations, forbearance acted as a liquidity bridge, preventing widespread short-term defaults and enabling borrowers to maintain cash flows for operational needs, though effects varied by servicer efficiency and borrower characteristics.^[112] Federal data indicate peak forbearance enrollment reached 8.5% of mortgages by mid-2020, correlating with stabilized housing markets and reduced eviction pressures in the immediate aftermath.^[113] These outcomes underscore forbearance's role in dampening acute distress channels, though relief was inherently temporary and contingent on subsequent repayment resumption.^[114]

Evidence from Economic Data

Empirical analyses of mortgage forbearance under the CARES Act, which allowed up to 180 days of payment suspension extendable to 12 months for federally backed loans, indicate that participation peaked at approximately 8.5% of outstanding mortgages by mid-2020, covering over $1.8 trillion in principal balances.^[115] By March 2023, over 90% of these borrowers had exited forbearance and achieved current payment status, with delinquency rates on forborne loans falling below pre-pandemic levels.^[82] This program correlated with sustained house price growth in high-uptake counties, even after controlling for unemployment rates, suggesting forbearance mitigated downward pressure on asset values during economic contraction.^[115] Household-level data reveal that forbearance enhanced liquidity, enabling borrowers to reduce high-interest credit card debt by an average of $20 per month among those at servicers with higher forbearance rates, particularly low-income households.^[116] Macroeconomic estimates from the program attribute a stabilization effect equivalent to injecting liquidity that supported aggregate demand, with forbearance acting as a cost-effective tool when paired with monetary easing, averting an estimated increase in foreclosures that could have amplified recessionary forces.^[91] Borrowers in regions with elevated COVID-19 exposure, who comprised a disproportionate share of participants, showed targeted relief that curbed financial distress without widespread spillover to non-vulnerable groups.^[114] For student loan forbearance, initiated in March 2020 and extended through September 2023, administrative credit data demonstrate an average monthly cash flow increase of $138 for eligible borrowers, correlating with heightened credit card spending but no significant shifts in labor supply or earnings.^[117] The pause, affecting 42 million borrowers with $1.6 trillion in debt, reduced financial stress indicators such as overdrafts while boosting consumption and investment, with aggregate demand drag estimated at $80 billion annually upon resumption of payments in 2023.^[118]^[111] Delinquency rates on student debt fell to near-zero during the period, reflecting deferred rather than forgiven obligations, though post-pause credit access improved modestly for previously strained borrowers.^[109] Cross-asset studies of debt moratoria, including both mortgage and student programs, find that forbearance primarily benefited liquidity-constrained households, increasing unsecured borrowing repayment by 4 cents per euro deferred in analogous European contexts, with U.S. parallels showing sustained repayment post-relief among creditworthy participants.^[110]^[119] Overall, these outcomes underscore forbearance's role in preserving short-term economic stability, though effects diminished as programs concluded, with no evidence of broad inflationary pass-through from deferred payments.^[120]

Criticisms and Risks

Moral Hazard and Market Distortions

Forbearance programs, by allowing borrowers to temporarily suspend payments without immediate penalties, introduce moral hazard risks, as individuals and firms may strategically opt into relief despite sufficient liquidity, anticipating lenient repayment terms or further extensions. An experimental study involving 1,060 U.S. homeowners in April 2020 found that 24.22% would enter forbearance under a simple honor code, dropping to 15.85% with a one-page attestation requiring affirmation of need under penalty of recourse, indicating approximately 6.23% incidence of strategic behavior. Among strategic entrants, redirected mortgage payments went toward necessities (31.31%), cash savings (21.15%), stock investments (7.48%), and debt consolidation (24.82%), rather than solely distress relief. Similarly, analysis of CARES Act approvals suggested over 50% of forborne mortgages may not have reflected genuine hardship, exacerbating risks under provisions permitting up to 12 months of no-documentation forbearance without fees or negative credit reporting. While aggregate data from sources like the Mortgage Bankers Association showed forbearance peaking at 8.55% of loans in June 2020 before declining, these dynamics highlight incentives for moral hazard beyond empirically observed low widespread abuse in income-targeted cohorts. Such programs distort markets by impeding natural price discovery and resource reallocation, as suspended foreclosures and payments prop up distressed assets, reducing supply and inflating valuations. In Wisconsin, implementation of CARES Act forbearance correlated with an average home price increase of $11,354—17.4% of the 37% statewide rise from $175,000 in January 2019 to $240,000 in December 2021—primarily by averting forced sales in hard-hit areas. This supply constriction mirrors broader evergreening practices, where lenders extend or refinance non-performing loans to avoid recognizing losses, particularly among low-capitalized banks, leading to mispriced credit and sustained "zombie" borrowers or firms. Regulatory forbearance during crises, as in post-2008 and COVID-19 eras, relaxes provisioning norms, enabling stressed institutions to channel funds to low-quality existing clients rather than viable new opportunities, thus perpetuating inefficient capital allocation. Empirical models of U.S. supervisory loan data confirm low-capital banks systematically understate risks in such restructurings, amplifying systemic distortions over time.

Long-Term Financial Consequences

Empirical analyses of COVID-19-era mortgage forbearance under the CARES Act indicate that, upon exit, participating borrowers experienced sustained reductions in delinquency rates by up to 5 percentage points and foreclosure risks by 1 percentage point, with these improvements persisting for at least three years post-forbearance without significant rebound effects into heightened financial distress.^[87] For a cohort of loans in forbearance as of March 2021, 52.5% were current by March 2023, with only 2.7% 30-89 days past due and 1.0% seriously delinquent (90+ days), reflecting broad success in repayment resumption via plans or refinancing.^[82] However, outcomes varied by borrower characteristics, with minority and lower-income households showing higher post-exit delinquency risks compared to others, though overall foreclosure rates remained low at 0.2% for these loans versus 2.7% for non-forbearance delinquents.^[121]^[82] Accumulated arrears during forbearance periods—often repaid through capitalized interest or extended terms—imposed longer-term debt burdens on borrowers, potentially elevating credit utilization and constraining future borrowing capacity, though temporary credit score dips typically recovered upon consistent payments.^[87] Lenders and servicers faced upfront costs from advancing principal, interest, taxes, and insurance payments to investors during forbearance—estimated to strain liquidity for smaller institutions—but these were mitigated by avoided foreclosure expenses, including legal fees and property maintenance, as default transitions proved lower than pre-pandemic baselines.^[122] Net systemic impacts included stabilized housing inventories, preventing distress sales that could have depressed prices by 5-10% in high-forbearance regions, though prolonged forbearance (over six months) correlated with temporarily elevated but ultimately resolving delinquency upon exit.^[87]

Recent Developments and Future Implications

Post-COVID Trends

Following the expiration of widespread COVID-19 forbearance programs, such as those under the U.S. CARES Act providing up to 360 days of payment relief for federally backed mortgages, the volume of active forbearances declined precipitously. By March 2023, the majority of borrowers who entered forbearance in 2020-2021 had exited, with most—over 90%—resuming current payment status, including disproportionate shares among Black and Hispanic borrowers who had initially utilized the programs at higher rates.^[82] This trend continued into 2025, with the share of mortgage loans in forbearance falling to 0.40% by January, of which only 3.0% remained tied to COVID-19 hardships, the rest primarily due to natural disasters or other localized events.^[123] Delinquency rates post-exit reflected a mixed recovery, bolstered by strong labor markets and rising home equity but revealing vulnerabilities among certain cohorts. Overall U.S. mortgage delinquency for one-to-four-unit properties dropped to a seasonally adjusted 3.93% in the second quarter of 2025, the lowest in over two decades outside pandemic distortions.^[124] However, Federal Housing Administration (FHA) loans originating from pandemic-era forbearances showed elevated delinquency, with many arrangements—intended to avert immediate foreclosures—transitioning into sustained payment shortfalls by mid-2025, signaling potential upticks in defaults for lower-credit borrowers.^[125] Studies indicate that minority and lower-income households were 1.5 to 2 times more likely to re-enter delinquency after forbearance compared to white and higher-income peers, attributable to pre-existing payment struggles rather than the forbearance itself.^[121] ^[92] In Europe, post-COVID forbearance trends mirrored a shift from blanket moratoria to targeted interventions, as European Banking Authority (EBA) guidelines on loan repayment deferrals—applied through 2020-2021—expired, requiring banks to resume individual credit assessments by late 2021.^[126] Payment holidays, such as the UK's initial three-month freezes extended variably by lenders, largely phased out by 2022, with deferred amounts reamortized to avoid principal forgiveness and mitigate moral hazard.^[127] This normalization coincided with stabilized non-performing loan ratios across the EU, though legacy deferrals contributed to slightly prolonged distress in high-unemployment regions like southern Europe, where repayment backlogs averaged 5-10% of deferred portfolios into 2023.^[128] Longer-term data underscores forbearance's role in averting widespread distress without inducing systemic fragility. Instrumental analyses of CARES Act effects show reductions in mortgage delinquency by up to 5 percentage points and foreclosures by 1 percentage point through 2024, though with spillover increases in non-housing delinquencies like credit cards for some borrowers.^[87] ^[129] By 2025, forbearance has evolved into a more discretionary tool, reserved for verifiable hardships amid elevated interest rates, contrasting the universal access of pandemic-era policies and reflecting regulatory emphasis on sustainability over indefinite relief.^[130]

Emerging Economic Pressures

Higher interest rates persisting into 2025, following the European Central Bank's aggressive hikes from 2022 onward, have elevated debt servicing costs for households and corporations across the euro area, intensifying strains on existing forbearance arrangements. Corporate loan rates have risen variably by country, with the rapid policy tightening contributing to broader borrower distress in sectors sensitive to rate changes, such as real estate and manufacturing. This environment risks elevating forborne exposures, as concessions granted during lower-rate periods become less viable amid funding cost pressures on banks themselves.^[131]^[132] The phase-out of temporary COVID-19 relief measures, including derogations from standard forbearance classification under IFRS 9, has compelled banks to reassess and report distressed loans more rigorously since 2021, unmasking potential asset quality deterioration. By mid-2025, the European Banking Authority's consultations on amending default definition guidelines propose shortening probation periods for certain forbearance measures from 12 to 3 months and adjusting for interest rate shifts between origination and concession, aiming to curb leniency that could obscure true credit risks. These regulatory shifts limit banks' flexibility in extending forbearance, particularly as economic forecasts indicate euro area GDP growth slowing to 0.9% in 2025 amid trade tensions and geopolitical volatility.^[133]^[134] Geopolitical factors, including the ongoing Ukraine conflict and Middle East instability, compound these pressures by driving energy price volatility and supply chain disruptions, which erode corporate profitability and household resilience in forbearance. The ECB's supervisory framework for 2024-2026 emphasizes banks' preparedness for volatile funding and higher operational costs, warning that unchecked forbearance could amplify systemic vulnerabilities if recessionary risks materialize. Empirical data from the EBA's Q1 2025 Risk Dashboard reveal stable but monitored non-performing exposure ratios, with forbearance volumes potentially rising if growth undershoots projections, underscoring the tension between short-term relief and long-term prudential stability.^[132]^[135]

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[109]
How the Student Loan Payment Pause Affected Borrowers' Credit ...
Jan 13, 2025 · For each of the 17 million student loan borrowers in active repayment, the pause freed up $280 a month,2 on average, or about $13,500 per person ...<|control11|><|separator|>
[110]
[PDF] Debt Moratoria: Evidence From Student Loan Forbearance
The 2020 student loan moratorium led to a drop in payments, delinquencies, and increased credit scores. Borrowers increased private debt, and increased credit ...
[111]
The impact of debt forbearance on borrowers' financial behavior and ...
Our results show that forbearance leads to increased consumption and investment and reduced bank overdrafts, consistent with a decrease in financial stress.
[112]
Intermediation frictions in debt relief: Evidence from CARES Act ...
Our results therefore indicate that forbearance provided significant liquidity to households by enabling borrowers to pause their payments. Furthermore the ...
[113]
[PDF] Inequality in the Time of COVID-19: Evidence from Mortgage ...
In contrast, we show that mortgage forbearance programs have helped alleviate inequalities in the short term with targeted forbearance programs. Third, we ...
[114]
On Target: Debt forbearance policies help curb pandemic financial ...
This should alleviate concerns about the moral hazard effects of debt relief, leading to a more widespread loan renegotiation effort during such times.
[115]
The Effect of Mortgage Forbearance on House Prices During COVID ...
Mar 19, 2021 · We find that, on average, the availability of forbearance during the pandemic increased house price growth by 0.6 percentage points between ...
[116]
[PDF] Intermediation Frictions in Debt Relief:Evidence from CARES Act ...
Mar 8, 2022 · The forbearance program, authorized by the CARES Act in March 2020, allows bor- rowers with federally backed mortgages to temporarily pause ...
[117]
Evaluating the Effect of Deferred Student Loan Repayments | NBER
A pandemic-driven debt relief measure freezing student loan repayments provided a large stimulus to the economy while raising long-term debt burdens.<|separator|>
[118]
Debt Payments and Spending: Evidence from the 2023 Student ...
Sep 5, 2025 · Our results imply that the end of forbearance amounted to a noticeable drag on aggregate demand of roughly $80 billion at an annual rate. More ...
[119]
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5158198
[120]
[PDF] COVID19 and debt relief draft 01_12_2021_TP_AS 01_20_2021
Overall, this evidence suggests that debt forbearance policies have mainly affected borrowers who are less creditworthy and more likely to be liquidity ...
[121]
Inequality in the Time of COVID-19: Evidence from Mortgage ...
Finally, we show that minority and lower-income borrowers are more likely to fall into delinquency and default after exiting forbearance and that fast-tracking ...
[122]
Mortgage Forbearance Rates during the COVID-19 Crisis
Nov 17, 2020 · We find that forbearance rates during the COVID-19 period are similar to those during the 2017 Storms but are much higher than rates during the Baseline period.
[123]
Share of Mortgage Loans in Forbearance Decreases to 0.40% in ...
Feb 18, 2025 · Another 32.9% are in forbearance because of a natural disaster. The remaining 3.0% of borrowers are still in forbearance because of COVID-19.Missing: post- trends
[124]
Mortgage Delinquencies Decrease Slightly in the Second Quarter of ...
Aug 14, 2025 · The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 3.93 percent ...Missing: COVID 2022-2025
[125]
FHA delinquencies rising on pandemic forbearance arrangements
May 22, 2025 · Many forbearance arrangements made to avoid foreclosure during the period are now delinquent, signaling an impending rise in owners forced to place their ...
[126]
Guidelines on legislative and non-legislative moratoria on loan ...
The aim of these Guidelines is to clarify the requirements for public and private moratoria, which if fulfilled, will help avoid the classification of exposures ...
[127]
[PDF] Payment holidays in the age of Covid: implications for loan ...
Governments and banks have introduced payment deferral programmes to support borrowers affected by Covid-19. But deferred payments are not forgiven and must be ...<|control11|><|separator|>
[128]
COVID-19 and retail customers | Fairness and forbearance: An update
Customers can apply for a further payment freeze of up to three months after the initial period comes to an end. One month payment and interest freeze: can be ...
[129]
[PDF] Mortgage Forbearance and Financial Distress in the Long Run
Jan 24, 2025 · ▷ Observe causal effect of forbearance on longer term borrower outcomes, e.g., delinquency, credit utilization, foreclosure risk. Page 11. 11/43.
[130]
[PDF] Are Mortgage Delinquencies and Forbearances Settling into a New ...
Jul 1, 2025 · It is characterized by forbearances settling in at around half a million mortgages and around 2 million delinquent mortgages, with foreclosure ...
[131]
Impact of ECB's policy rate changes on corporate loan rates varies ...
Nov 14, 2024 · The rapid rise in interest rates that began in 2022 has significantly increased loan servicing costs in the euro area's corporate sector.Missing: forbearance | Show results with:forbearance
[132]
SSM supervisory priorities for 2024-2026 - ECB Banking Supervision
While rising interest rates have had a positive impact on profitability so far, banks must be prepared to cope with more volatile funding sources, higher ...
[133]
[PDF] Consultation paper - European Banking Authority
Jul 2, 2025 · 5 It is noted that granted forbearance measures in general are expected to be viable payment solutions for obligors, such that the viability of ...
[134]
Spring 2025 Economic Forecast: Moderate growth amid global ...
May 19, 2025 · This Spring Forecast projects real GDP growth in 2025 at 1.1% in the EU and 0.9% in the euro area– broadly the same rates attained in 2024.Missing: forbearance COVID
[135]
EBA Risk Dashboard: First-quarter of 2025 Supervisory Data Shows ...
Sep 18, 2025 · •The EBA Risk Dashboard for Q1 2025 provides a comprehensive overview of the resilience and risk exposures of EU banks, using a wide range ...