The lender recourse/non-recourse issue didn’t come up at the FDIC-FRB housing finance symposium (see here for the agenda) but a recent paper by Andra Ghent and Marianna Kudlyak has some interesting things to say about it:
The recent surge in defaults on residential mortgages has renewed interest in under- standing borrowersdecisions of whether to default and what factors inuence that decision. One factor of interest is the recourse permitted to lenders. In some U.S. states, recourse in residential mortgages is limited to the value of the collateral securing the loan. In other U.S. states, the lender may be able to collect on debt not covered by the proceedings from a foreclosure sale by obtaining a de ciency judgment. Large increases in defaults in states that severely restrict lender recourse, such as California and Arizona, raise the question of whether allowing lenders more recourse substantially deter default.,,
We analyze the impact of lender recourse on mortgage defaults theoretically and empirically across U.S. states. We study the effect of state laws regarding deficiency judgments in a model where lenders can use the threat of a deficiency judgment to deter default or to shorten the default process. Empirically, we find that recourse decreases the probability of default when there is a substantial likelihood that a borrower has negative home equity. 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 of foreclosure.
