Foreclosure Sales and Recourse

Abstract

I document the imbalance of foreclosure sales with respect to recourse laws applied to primary mortgages in the U.S. using geographic state borders as exogenous variation combined with individual transaction data located close to the border. Under a regression discontinuity design, the relative volume of foreclosure sales (compared to regular sales) in recourse states was 13 percentage points lower on average with respect to non-recourse states from 2008 to 2010. Further evidence from a hedonic pricing model suggests that foreclosures in non-recourse states were sold by a larger discount after 2008 (6 percentage points from 2008 to 2010 and 9 percentage points from 2011 to 2012). Results are robust to differences in borrower characteristics at the loan origination and suggests differences in the incentives to default under recourse, as well as a higher volume of foreclosures in non-recourse states.

Keywords: Foreclosure sales, recourse, housing crisis