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

We measure the causal impact of reductions in benchmark interest rates on the renegotiation and performance of distressed loans, using 2000s subprime adjustable-rate mortgages as a laboratory. Subprime borrowers treated with larger benchmark Libor rate declines benefited from increased debt-renegotiation and lower debt-service payments. The estimated effects are similar across both current borrowers and those in default. Renegotiation of mortgage debt also reduced foreclosures over the longer term. However, following debt-renegotiation, surviving treated borrowers re-entered and lingered in serious delinquency. Findings suggest that while policy may effect reductions in benchmark rates and spur debt-renegotiation, such interventions may not lead to longer-run curative outcomes.