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April 2020, EB20-05

Economic Brief
Loan-Delinquency Projections for COVID-19
By Grey Gordon, John Bailey Jones, and Jessie Romero

The authors forecast the effects of COVID-19 on loan-delinquency rates
under three scenarios for unemployment and house-price movements.
Absent policy interventions, the model predicts peak loan-delinquency
rates of 2.8 percent in the favorable scenario, 8.1 percent in the severe
scenario, and 3.9 percent in the baseline scenario. The greatest reductions
in delinquency are achieved through home mortgage forbearance and
student loan forbearance, with fiscal transfers playing a smaller role.
A key concern facing fiscal and monetary policymakers is the extent to which the sharp decline
in economic activity stemming from the coronavirus pandemic will affect consumer debt payments. In a recent working paper, two authors of
this Economic Brief (Gordon and Jones) used data
from the 2016 Survey of Consumer Finances (SCF)
to project the incidence of loan delinquency or
default in the near future.1
To make these projections, Gordon and Jones assumed that delinquency or default occurs when
either of two financial ratios — the debt serviceto-income (DSY) ratio and the loan-to-value (LTV)
ratio — exceeds certain thresholds. They determined these thresholds by matching 2019 delinquency rates on home mortgage, credit card, and
student loan debt and then simulated forward
the DSY and LTV ratios for each SCF household
under different unemployment and house-price
scenarios. Using this methodology, they also
assessed how well various policy proposals —
fiscal transfers, student loan forbearance, and
home mortgage forbearance — would mitigate
increases in delinquency and default (D-D). While

EB20-05 – Federal Reserve Bank of Richmond

these calculations are not a perfect substitute for
a complete economic model, they should provide
reasonable first-pass estimates.
The authors considered three scenarios for the
unemployment and house-price shocks: a favorable case, a severe case, and an intermediate case
(the baseline).2 In the absence of policy interventions, they found that:
1. W
 hen both shocks follow their baseline trajectories, the D-D rate (measured as the fraction of
debt that is ninety-plus days delinquent) rises
from 2.3 percent in 2019 to 3.1 percent in 2021
and peaks at 3.9 percent in 2025. The delayed
peak is due to persistence in house-price decline.
Total write-offs end up being $580 billion.
2. W
 hen both shocks follow their most favorable trajectories, the D-D rate rises to 2.6 percent in 2021
and peaks at 2.8 percent in 2022. Total write-offs
end up being $420 billion.
3. W
 hen both shocks follow their worst-case trajectories, the D-D rate rises to 3.5 percent in 2021 and
peaks at 8.1 percent in late 2025. Total write-offs
end up being $1.1 trillion.

Page 1

2017:4

2020:2

2022:4

2025:2

2027:4

2030:2

Source: Grey Gordon and John Bailey Jones, “Loan Delinquency
Projections for COVID-19,” Federal Reserve Bank of Richmond
Working Paper No. 20-02, April 15, 2020.

The three policy interventions the authors analyzed
begin in the second quarter of 2020 and last for at
most three years. Among the three policies they
consider, the greatest reduction in the D-D rate is
achieved by home mortgage forbearance, then by
student loan forbearance, and lastly by fiscal transfers. With all three policies in place, like they currently
are under the Coronavirus Aid, Relief, and Economic
Security (CARES) act, D-D rates and write-offs fall
below their 2019 levels in the near term.
Delinquency Projections with Policy Outcomes
In the baseline scenario, both unemployment and
housing prices follow their baseline (intermediate)
trajectories. In particular, the unemployment rate
jumps to 20 percent in the second quarter of 2020,
stays there for a year, and then returns gradually to
its preshock level. House prices fall steadily until the
fourth quarter of 2025, with a total decline of 15 percent, and then start to recover. In the absence of any
countervailing policies, these shocks lead the D-D
rate to peak at about 3.9 percent at the end of 2025,
while write-offs reach $580 billion. The peak in delinquency coincides with, and is primarily attributable
to, the trough in house prices. Even though house
prices have the larger effect on peak delinquency

rates, in the nearer term, unemployment also raises
delinquency through its effects on credit card and
student loan debt. But because home mortgage
debt ($9.56 trillion in the fourth quarter of 2019) is
about four times larger than the sum of credit card
and student loan debt ($2.44 trillion), the overall
delinquency rate most closely tracks the delinquency rate for home mortgage debt.3
Figure 1 shows the effects of the policy interventions
in the baseline scenario. Because the policies the
authors evaluate all stop before 2025, the peak D-D
rates are invariant to policy. However, in the nearer
term, the policies lead to significantly lower delinquency rates. Mortgage forbearance generates the
largest decreases, but student loan forbearance has
significant effects as well. Both of these interventions
push delinquency below its baseline rate because
they cover households that would have been delinquent even in the absence of coronavirus-related
shocks. The effects of the fiscal stimulus are considerably smaller.
It is worth noting that in the absence of a complete
model, the authors cannot estimate the true costs
and benefits of these interventions. To give just
one example, policies that offset income losses or
Figure 2: Loan-Delinquency Rates with Different Policies
(Favorable Scenario)

Percent of Total Debt

Percent of Total Debt

Figure 1: Loan-Delinquency Rates with Different Policies
(Baseline Scenario)

2017:4

2020:2

2022:4

2025:2

2027:4

2030:2

Source: Grey Gordon and John Bailey Jones, “Loan Delinquency
Projections for COVID-19,” Federal Reserve Bank of Richmond
Working Paper No. 20-02, April 15, 2020.

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Figure 3: Loan-Delinquency Rates with Different Policies
(Severe Scenario)

10 percent) and house prices follow their severe
scenario (which features a decline of 25 percent).

Percent of Total Debt

Overall, the D-D rates in the data and in the model
show similar increases and similar overall patterns.
(See Figure 4 below.) The D-D rate rises sooner in
the model than in the data. This is because in the
data, the unemployment peak and the house-price
trough were only two years apart, whereas in the
model, Gordon and Jones assumed that unemployment peaks immediately while house prices bottom
out five years later. This is a reasonable assumption
given the swift onset of the coronavirus shock, as
opposed to the somewhat slower progression of
the Great Recession. Taking these considerations
into account, the model performs very well.
2020:2

2022:4

2025:2

2027:4

2030:2

Source: Grey Gordon and John Bailey Jones, “Loan Delinquency
Projections for COVID-19,” Federal Reserve Bank of Richmond
Working Paper No. 20-02, April 15, 2020.

reduce delinquency may also dampen the fall in
house prices.
Gordon and Jones also assess a favorable scenario
and a severe scenario. In the favorable scenario,
delinquency rates remain below 3 percent and writeoffs reach a maximum of $420 billion. (See Figure 2
on the previous page.) In the severe scenario, delinquency rates climb to 8.1 percent and write-offs
reach more than $1 trillion. (See Figure 3.)
It is worth noting that in every scenario, when all
three policies are enacted — like they now have
been — write-offs drop to essentially zero in 2021.
This suggests that delinquency rates will not rise
substantially in the near term despite the large disruptions the economy is experiencing.
Model Validation
A natural question is how well Gordon and Jones’s
methodology would have predicted the outcomes
observed in the Great Recession, when unemployment rose to 10 percent and house prices fell by 25
percent. To assess this in a simple way, the authors
assumed unemployment follows its favorable
scenario (which features peak unemployment of

Conclusion
Gordon and Jones considered three scenarios for the
unemployment and house-price shocks: a baseline
case, a favorable case, and a severe case.4 In the absence of policy interventions, they found that delinquency rates peak at 2.8 percent to 8.1 percent and
write-offs total $420 billion to $1.1 trillion depending
on the scenario. However, in the nearer term, policy
leads to significantly lower delinquency rates. Mortgage forbearance generates the largest decreases,
Figure 4: Comparing Great Recession Data to the Model

Percent of Total Debt

2017:4

-20

-15

-10

-5

0

5

10

15

Source: Grey Gordon and John Bailey Jones, “Loan Delinquency
Projections for COVID-19,” Federal Reserve Bank of Richmond
Working Paper No. 20-02, April 15, 2020.

Page 3

but student loan forbearance has significant effects
as well. The effects of the fiscal transfers are considerably smaller. In all three scenarios, when all three
policies are enacted — like they now have been —
write-offs drop to essentially zero in 2021.

Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

Grey Gordon is a senior economist, John Bailey
Jones is a senior economist and policy advisor,
and Jessie Romero is director of research publications in the Research Department at the Federal
Reserve Bank of Richmond.
Endnotes
1

F amilies were included in the sample if their incomes were at
least $10,000 and their debts (credit card, student loans, home
mortgages) totaled at least $1,000. Households older than
sixty-five were dropped because they do not have much debt
and are unlikely to be affected by changes in the aggregate
unemployment rates. With these restrictions, the initial sample
of 31,240 families dropped to 15,009. The Survey of Consumer
Finances is available online.

2

F or details on each scenario, see Grey Gordon and John Bailey
Jones, “Loan Delinquency Projections for COVID-19,” Federal
Reserve Bank of Richmond Working Paper No. 20-02, April 15,
2020.

3

I n the absence of loan forbearance, interest rates were held
fixed throughout the authors’ projections. They therefore do
not account for the possibility that interest rates will rise as the
economy recovers from the pandemic. Most home mortgages
and student loans are fixed-rate, implying that changes in
interest rates only affect new borrowers. Gordon and Jones
explored the consequences of raising the nominal credit card
rate by 3 percentage points annually at different dates. Because credit card debt is a small component of total debt, they
found extremely limited effects.

4

For details on each scenario, see Gordon and Jones, 2020.

This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond and include the
italicized statement below.

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OF RICHMOND
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