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

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  • Stuart Gabriel
  • Chandler Lutz

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.

Suggested Citation

  • Stuart Gabriel & Chandler Lutz, 2024. "The Impact of Crisis-Period Interest Rate Declines on Distressed Borrowers," The Review of Financial Studies, Society for Financial Studies, vol. 37(12), pages 3710-3760.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:12:p:3710-3760.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae051
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    More about this item

    Keywords

    E52; E58; R20; R30;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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