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

91 Pages Posted: 30 Jun 2021 Last revised: 25 Oct 2023

See all articles by Stuart A. Gabriel

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Chandler Lutz

Securities and Exchange Commission

Date Written: October 24, 2023

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 these benefits were offset by treated borrowers who lingered in delinquency. Findings indicate that monetary easing can spur debt-renegotiation but alone 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

Gabriel, Stuart A. and Lutz, Chandler, The Impact of Crisis-Period Interest Rate Declines on Distressed Borrowers (October 24, 2023). Available at SSRN: https://ssrn.com/abstract=3869199 or http://dx.doi.org/10.2139/ssrn.3869199

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

Chandler Lutz (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

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