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http://ssrn.com/abstract=1591524
 
 

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Recourse and Non-Recourse Mortgages:
Foreclosure, Bankruptcy, Policy


Ron Harris


Tel Aviv University - Buchmann Faculty of Law

April 10, 2010


Abstract:     
The recourse-non-recourse dimension is fundamental in any loan as it deals most directly with the pool of assets out of which lender can collect at delinquency and default. This paper calls attention to an exceptional feature of the American home mortgage market, compared to mortgage markets elsewhere in the world, the prevalence of non-recourse mortgages as created by foreclosure rules in leading states such as California and Arizona and federal bankruptcy law. It explains how the legal impediments on recourse to personal assets and future income, together with the recent drop in home prices, led to a dramatic rise in strategic foreclosures (ones that resulted from negative equity rather than from cash-flow problems). No less than 588,000 strategic walk-away mortgage defaults took place, representing nearly 20% of all foreclosures in 2008. Most of these were not likely to happen in a recourse regime.

The paper then deals with policy. It uses a few theoretical frameworks: put option, default insurance, asset partitioning and screening. It examines the pros and cons of recourse regime and of non-recourse regime. It concludes that there is no compelling justification for prohibiting either recourse or non-recourse loans. The benefits and pitfalls of a dual regime are then examined. The question relating to why we don't observe a dual regime in the real world is addressed. The paper recommends that jurisdictions that prohibit recourse loans lift this prohibition. It concludes that both recourse and non-recourse should be on the table, on the levels of regulation policy and lending practices.

Number of Pages in PDF File: 42

Keywords: Strategic Default, Negative Equity, Home Mortgages, Foreclosure, Bankruptcy, Credit Market Regulation

JEL Classification: D18, D82, G21, G28, K2, L85, R21, R31

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Date posted: April 18, 2010 ; Last revised: April 30, 2010

Suggested Citation

Harris, Ron, Recourse and Non-Recourse Mortgages: Foreclosure, Bankruptcy, Policy (April 10, 2010). Available at SSRN: http://ssrn.com/abstract=1591524 or http://dx.doi.org/10.2139/ssrn.1591524

Contact Information

Ron Harris (Contact Author)
Tel Aviv University - Buchmann Faculty of Law ( email )
Ramat Aviv
Tel Aviv 69978, IL
Israel
972 3 6408798 (Phone)
972 3 6407260 (Fax)
HOME PAGE: http://www2.tau.ac.il/Person/law/researcher.asp?id=agihecicf
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