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Recourse and Residential Mortgage Default: Evidence from U.S. States

Review of Financial Studies

Federal Reserve Bank of Richmond Working Paper No. 09-10R

63 Pages Posted: 11 Jul 2009 Last revised: 24 Nov 2011

Andra C. Ghent

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Marianna Kudlyak

Federal Reserve Bank of San Francisco

Date Written: February 25, 2011

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.

Keywords: Deficiency Judgment, Foreclosure, Negative Equity, Residential Mortgage Default, Recourse

JEL Classification: E44, G21, G28, K11, R20

Suggested Citation

Ghent, Andra C. and Kudlyak, Marianna, Recourse and Residential Mortgage Default: Evidence from U.S. States (February 25, 2011). Federal Reserve Bank of Richmond Working Paper No. 09-10R. Available at SSRN: https://ssrn.com/abstract=1432437 or http://dx.doi.org/10.2139/ssrn.1432437

Andra C. Ghent (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Marianna Kudlyak

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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