Recourse and Residential Mortgages: The Case of Nevada

Abstract

a b s t r a c tThe state of Nevada passed legislation in 2009 that abolished deficiency judgments for purchase mortgage loans made after October 1, 2009, and collateralized by primary single-family homes. In this paper, we study how this change in the law affected equilibrium mortgage lending. Using unique mortgage loan-level application data and a difference-in-differences approach that exploits the qualification criterion, we find that the law change led to a decline in equilibrium loan sizes of about 1 to 2 percent. There exists some evidence that mortgage approval rates also decreased for the affected loan applications. These results suggest that making the deficiency judgment law more default friendly in Nevada generated material cost on borrowers at the time of mortgage origination.

Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays

“…On the other hand, Li and Oswald (2013) examine the effect of abolishing deficiency judgments in Nevada in 2009 and do not find an effect on mortgage default or foreclosures. They suggest that evidence of anti-deficiency statutes' effects on default may be due to selection bias, with lenders lending to riskier borrowers when they can obtain deficiency judgments.…”

Mortgage arrears, regulation and institutions: Cross-country evidence

“…Most European countries and many states in the U.S. allow mortgage lenders to claim borrowers' financial assets when the collateral falls short of the loan balance. Evidence from the U.S. supports the hypothesis that homeowners in states with recourse legislation are less likely to default ( Ghent and Kudlyak, 2011 ;Li and Oswald, 2017 ).…”

“…The first column adds a dummy to the model shown in column (6) of Table 3 which is one for countries with recourse and zero otherwise. A full recourse procedure is expected to increase borrowers' incentives to repay their debt because it gives more rights to the lenders in pursuing borrowers' assets in case of default ( Ghent and Kudlyak, 2011 ;Li and Oswald, 2017 ). Indeed, the coefficient on the recourse variable is negative and significant.…”