The Impact of Crisis-Period Interest Rate Declines on Distressed Borrowers
70 Pages Posted: 30 Jun 2021 Last revised: 22 Apr 2022
Date Written: April 21, 2022
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 interest rate reductions benefited from increased debt-renegotiation probabilities and lower debt-service payments. Renegotiation rates for investors were substantially higher than for baseline borrowers, suggesting that borrower financial acumen plays an important role in renegotiation outcomes. While renegotiations reduced foreclosures in the long-run, surviving treated borrowers lingered in delinquency. Findings indicate that monetary policy can reduce benchmark rates and spur debt-renegotiation but may not lead to longer-run curative outcomes.
Keywords: Monetary Policy Transmission, Financial and Economic Crisis, Distressed Borrowers, Housing and Mortgage Markets
JEL Classification: E52, E58, R20, R30
Suggested Citation: Suggested Citation