Journal Article

Recourse and Residential Mortgage Default: Evidence from US States

Andra C. Ghent and Marianna Kudlyak

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 24, issue 9, pages 3139-3186
Published in print September 2011 | ISSN: 0893-9454
Published online June 2011 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhr055
Recourse and Residential Mortgage Default: Evidence from US States

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We quantify the effect of recourse on default and find that recourse affects default by lowering the borrower's sensitivity to negative equity. At the mean value of the default option for defaulted loans, borrowers are 30% more likely to default in non-recourse states. Furthermore, for homes appraised at $500,000 to $750,000, borrowers are twice as likely to default in non-recourse states. We also find that defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu, in states that allow deficiency judgments. We find no evidence that mortgage interest rates are lower in recourse states.

Keywords: E44; G21; G28; K11; R20

Journal Article.  22052 words. 

Subjects: Money and Interest Rates ; Banking ; Financial Regulation ; Property Law ; Household Analysis

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