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

See all articles by Andra C. Ghent

Andra C. Ghent

University of Utah - David Eccles School of Business

Marianna Kudlyak

Federal Reserve Bank of San Francisco; Hoover Institution; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

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). Review of Financial Studies, 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 Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Marianna Kudlyak

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Hoover Institution ( email )

Stanford, CA 94305
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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