The economics of debt relief during a pandemic: lessons from the experience in Ireland

The coronavirus (COVID-19) macroeconomic shock was different from previous crises in terms of its speed, the severity of the resulting job losses, the fiscal support provided in response and the stability of house prices. In response to this sudden shock and in line with European Banking Authority guidance, lenders in Ireland offered temporary COVID-19 payment breaks, or moratoria, to homeowners with mortgages. COVID-19 payment breaks had minimal eligibility criteria, did not require a regulatory risk reclassification of loans and had no impact on borrower credit records. All of this enabled a rapid response that minimised costs to both borrowers and lenders. As the initial payment breaks have expired, lenders have typically responded to a relatively small number of requests for further arrears support or restructuring by extending moratoria or other temporary arrangements. Based on the lessons learned from research into the economics of debt relief since the global financial crisis, we view this initial response as appropriate for the specific, temporary economic shock that the Irish economy faced in March 2020. As the pandemic progresses, the optimal future response of policymakers will depend on how both the labour and housing markets evolve. In circumstances such as those that prevailed in early 2021, when uncertainty and additional temporary liquidity shocks affected some sectors, additional extensions of payment moratoria or other short-term arrangements may be appropriate for some borrowers. However, should it appear that income shocks were becoming more permanent, perhaps because of structural shifts in demand, or if house prices were to decline, longer-term solutions might be required, similar to those implemented after the global financial crisis. In light of the successful pandemic response, we also consider the benefits of mortgage contracts that allow households to opt into payment moratoria or reduced payment levels in certain situations. To avoid incentive problems, this optionality would ideally either (i) have to be triggered by the declaration of a national emergency or (ii) perhaps more simply be time-limited or tied to periodic amortisation requirements. In all cases, a major advantage of such optionality would be the automatic nature of the option. This would mean that there was no need for urgent coordination among policymakers or lenders to avoid issues such as credit records or risk classifications being altered as a result of the widespread requirement for payment relief.