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Recourse versus non-recourse mortgage debt and costly state verification

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  • Mihaylovski, Peter

Abstract

This paper explores how policies that allow lenders to pursue borrowers for remaining debt after mortgage foreclosure (mortgage recourse) influence key aspects of the housing market and the broader macroeconomy. To this end, I develop a dynamic stochastic general equilibrium (DSGE) model featuring savers and borrowers, strategic default behavior on housing debt, and an endogenous loan-to-value (LTV) ratio. The analysis indicates that real house prices, LTV ratios, and mortgage debt levels increase with greater recourse tightness, while mortgage spreads decline. Default rates also increase with stricter recourse, despite more severe penalties targeting borrowers' assets beyond their housing collateral. In addition, mortgage recourse amplifies the volatility of key financial variables - such as LTV ratios, default rates, and mortgage spreads - intensifying financial cycles. Finally, mortgage recourse appears to be welfare-enhancing only for savers, as it provides an insurance-like mechanism in the event of borrower default. These findings underscore the complex tradeoffs involved in mortgage recourse policies, offering important insights into their role in shaping housing markets and, more broadly, economic stability.

Suggested Citation

  • Mihaylovski, Peter, 2025. "Recourse versus non-recourse mortgage debt and costly state verification," WiSo-HH Working Paper Series 89, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    • Handle: RePEc:zbw:uhhwps:323580
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    References listed on IDEAS

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    2. Andrieș, Alin Marius & Copaciu, Anca & Popa, Radu & Vlahu, Razvan, 2025. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," European Economic Review, Elsevier, vol. 173(C).
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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