Should European Mortgages Be Non-Recourse? Macroeconomic Arguments.

Abstract

This article discusses how macroeconomic arguments should shape the design of mortgage contracts. Mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities and cause deeper and more persistent recessions. Default mitigates liquidity traps because it redistributes wealth towards the borrowers with the highest marginal propensity to consume. This redistribution has positive aggregate effects when nominal rigidities are binding. This mechanism can account for up to 30% of the recovery gap during the Great Recession between the U.S. (mostly a non-recourse economy) and European economies with recourse mortgage systems. The article reviews policy options for Europe.

Keywords: Aggregate Demand, Consumption, Default, Europe, Foreclosures, Housing, Liquidity Traps, Mortgages, Nominal Rigidities, Recourse, Recovery

JEL Classification: E51, H81, G21, R2