Recourse and Residential Mortgage Default: Evidence from U.S. States
Andra C. Ghent
Arizona State University (ASU) - Finance Department
Federal Reserve Banks - Federal Reserve Bank of Richmond
February 25, 2011
Review of Financial Studies
Federal Reserve Bank of Richmond Working Paper No. 09-10R
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
Date posted: July 11, 2009 ; Last revised: November 24, 2011
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