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

70 Pages Posted: 30 Jun 2021 Last revised: 22 Apr 2022

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: April 21, 2022

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 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

Gabriel, Stuart A. and Lutz, Chandler, The Impact of Crisis-Period Interest Rate Declines on Distressed Borrowers (April 21, 2022). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
27
Abstract Views
336
PlumX Metrics