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Recourse and Residential Mortgage Default: Evidence from U.S. StatesAndra C. GhentArizona State University (ASU) - Finance Department Marianna KudlyakFederal Reserve Banks - Federal Reserve Bank of Richmond February 25, 2011 Review of Financial Studies Federal Reserve Bank of Richmond Working Paper No. 09-10R Abstract: We quantify the effect of recourse on default. We find that recourse affects default through 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; for homes appraised at $500,000 to $750,000, borrowers are twice as likely to default in non-recourse states. We also find that, in states that allow deficiency judgments, defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu. We find no evidence that mortgage interest rates are lower in recourse states.
Number of Pages in PDF File: 63 Keywords: Deficiency Judgment, Foreclosure, Negative Equity, Residential Mortgage Default, Recourse JEL Classification: E44, G21, G28, K11, R20 working papers seriesDate posted: July 11, 2009 ; Last revised: November 24, 2011Suggested CitationContact Information
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