The Impact of Crisis-Period Interest Rate Declines on Distressed Borrowers

Stuart Gabriel and Chandler Lutz

The Review of Financial Studies, 2024, vol. 37, issue 12, 3710-3760

Abstract: We measure the causal impact of reductions in benchmark interest rates on the renegotiation and performance of distressed loans, using 2000s subprime mortgages as a laboratory. Subprime borrowers treated with larger benchmark rate reductions benefited from increased debt-renegotiation probabilities and lower debt-service payments. Modification rates were similar among current and delinquent borrowers but higher for real estate investors, highlighting the role of financial acumen in renegotiation. Renegotiations also reduced longer-run foreclosures, but treated borrowers who lingered in delinquency offset these benefits. Findings suggest monetary easing can spur debt renegotiation but alone may not lead to longer-run curative outcomes.

Keywords: E52; E58; R20; R30 (search for similar items in EconPapers)
Date: 2024
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