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

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.