Theory and Evidence from U.S. States
Author:
Andra C. Ghent, Zicklin School of Business, Baruch College
Marianna Kudlyak, Research Department, Federal Reserve Bank of Richmond
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.
This paper was presented on September 16th, 2009 at the FDIC's Seidman Center for the FHFA and the FDIC cohosted symposium on “Improving Assessment of the Default Risk of Single-Family Mortgages”. The symposium included sessions on: Collateral and Appraisal Issues, Underwriting Standards, and Issues in Default Modeling. Attendance included housing and mortgage market experts from industry, academia, and government. The research paper was selected from submissions received in response to a Call for Papers issued in the spring.
The Call for Papers can be downloaded here.