The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which granted up to 12 months of forbearance to homeowners with federally backed mortgages, ensures that if a mortgage borrower covered under the law and adversely affected by the pandemic enters forbearance, their missed mortgage payments will not cause the mortgage to go into default status and will not negatively affect the borrower’s credit score.

But not all delinquent mortgage borrowers are in a forbearance plan. Some borrowers are “needlessly delinquent”—though eligible, they have not entered forbearance. Other borrowers have non-agency mortgages and remain outside the scope of institutional forbearance, though many have worked out a forbearance agreement privately with their servicer. And the terms of forbearance for homeowners with non-agency mortgages may differ from institutionalized forbearance implemented under the CARES Act.

These borrowers who are delinquent but not in forbearance are “unprotected homeowners,” and large share of them live in predominantly Black and Hispanic neighborhoods.

According to credit bureau data, 1.3 percent of adults with one first mortgage were considered 60 or more days delinquent as of August 2020, which includes borrowers who may have been delinquent before the pandemic. If they were in forbearance, they would still be considered current for credit reporting purposes.

Mortgaged homeowners in predominantly Black and Hispanic zip codes are more likely to have an unprotected delinquency than those in predominantly white zip codes

Based on an analysis of credit bureau and American Community Survey (ACS) data, we find that homeowners in predominantly Black or Hispanic neighborhoods are slightly more likely to be unprotected than those in predominantly white neighborhoods. This analysis corroborates other research findings illustrating that across many economic indicators, the pandemic has had a worse impact on communities of color.

Using ACS data, we classified zip codes based on the largest racial or ethnic group in that area as a share of the population. We restricted our analysis to borrowers with just one first mortgage to isolate homeowners with a primary residence from those with multiple homes.

Homeowners with a first mortgage in predominantly Black neighborhoods were the most likely to be unprotected (2.3 percent), followed by homeowners in predominantly Hispanic neighborhoods (1.6 percent).

Homeowners in predominantly white neighborhoods were less likely to be delinquent for credit reporting purposes (1.2 percent). In neighborhoods where a different racial or ethnic group (usually Asian people) makes up the largest share of the population, only 0.9 percent of homeowners were considered unprotected. 

Unprotected homeowners are more likely to face foreclosure and other financial consequences

Because the CARES Act’s foreclosure moratorium does not cover borrowers with non-agency mortgages, unprotected homeowners with non-agency mortgages face a higher likelihood of losing their home if they are not in a privately agreed–upon forbearance plan.

Delinquency without the protection of forbearance, for either agency or non-agency mortgage borrowers, will also lower that borrower’s credit score. These unprotected borrowers have credit scores that, at the median, are almost 200 points lower than protected and current borrowers. Continuing to miss mortgage payments without the protection of forbearance will further weigh on their scores.

A tight credit environment further hurts unprotected homeowners

During this time, credit standards have also tightened, and borrowers typically need a higher credit score to secure a loan.

The combination of low credit scores and tight lending standards makes it impossible for these delinquent borrowers to refinance to lower their payment or extract home equity and makes it more difficult to get a personal loan at a reasonable rate to weather this crisis. Coming out of the pandemic, as the economy begins to recover, these borrowers will face limited access to credit for small business investments, mortgages, and other loans that could help them increase their wealth.

Historically, households of color, and Black households in particular, had lower credit scores than white households, partly because of structural barriers in employment, income, and access to credit. Consequently, the greater proportion of unprotected mortgaged homeowners in neighborhoods of color could further exacerbate pre-pandemic disparities in credit scoring and access to wealth-building tools, while slowing the recovery of homeowners of color and leaving them further behind.

Public policy efforts could reduce the adverse impact of unprotected mortgage delinquency

Our previous analysis on needless delinquencies suggests that reaching unprotected borrowers with an agency mortgage will require targeted efforts, with combined outreach from servicers, consumer groups, and the government. For example, the US Treasury Department, which coordinated these efforts during the previous crisis, could take the lead and build consensus among stakeholders.

Specific targeting of predominantly Black and Hispanic neighborhoods will be necessary to ensure delinquent borrowers with agency mortgages get forbearance plans. Forbearance information should be offered in multiple languages to reach borrowers in communities with proportionately large non-English-speaking populations. Immediate outreach efforts are crucial to address current racial and ethnic disparities in delinquencies and to limit racial and ethnic wealth disparities as the economy recovers. But conversations with industry stakeholders have indicated that a small proportion of homeowners have refused forbearance, which could complicate outreach efforts.

We also need more data to better understand the demographic and geographic characteristics of non-agency mortgage borrowers. A recent Urban Institute event on forbearance statistics revealed that various data sources showed vastly different results for the share of non-agency mortgage borrowers in forbearance. This lack of statistical agreement could lead to an unclear picture of the share of non-agency borrowers in forbearance and impair efforts to identify those who need assistance.

Ensuring equitable opportunities will strengthen the economic recovery

Homeowners of color were already disadvantaged before the recession, making them more vulnerable to an economic shock. Predictably, the current downturn has disproportionately hurt Black and Hispanic homeowners, exacerbating the gaps between homeowners of color and their white counterparts.

These unprotected homeowners of color are feeling the impact of the recession, and the long-term effects could delay their recovery. A slower recovery for homeowners of color risks further widening racial and ethnic wealth disparities as the overall economy begins to mend. But the suggested policies could help ensure more homeowners of color escape the worst of this recession and are included in the economic rebound.