Did non-recourse mortgages cause the mortgage crisis?

In trying to explain the severity of the foreclosure crisis in the U.S., some commentators have argued that a peculiar feature of U.S. mortgage contracts is partly to blame. In the U.S., they argue, in contrast to other countries, mortgage loans are "non-recourse" meaning that if the borrower fails to make payments, the lender can seize the collateral but has no "recourse" to any other assets of the borrower. In other words, a borrower with a million dollars in the bank can stop paying her mortgage and all the lender can do is foreclose and sell the house, while the borrower suffers no other financial harm. In our current environment, the argument goes, falling house prices mean that many borrowers have negative equity -- homes worth less than they owe on their mortgages -- and so they can simply "walk away" from their mortgage without suffering any other financial loss. The policy implications are obvious: if lenders could go after other assets, we would not see nearly as many foreclosures as we do.¹

This argument has been made by many leading commentators including several economists at top universities. But is it true? A new paper by Andra Ghent of Baruch College and Marianna Kudlyak of the Richmond Fed entitled, “Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States,” seeks to answer that. The authors do three things in the paper: review the institutional evidence on recourse in the U.S.; develop a theoretical model; and conduct some empirical analysis using cross state differences in foreclosure rules to estimate the effects of recourse vs. non-recourse. Let me discuss all three in turn.

For a full discussion see: http://docs.google.com/View?id=ajgrc2d2jwxp_209f47wtwdm