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Recourse and the Residential Mortgage Market: the Case of Nevada

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  • Wenli Li
  • Florian Oswald

    (UCL - University College of London [London])

Abstract

The state of Nevada passed a legislature 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 lenders' mortgage lending and households' mortgage application and subsequent default decisions in response to the law change. Using unique mortgage loan level application and performance data, we find strong evidence that lenders tightened their lending standards. In particular, lenders reduced approval rates and loan sizes for affected mortgages after the implementation of the law. Households, by contrast, did not delay their mortgage applications till after the law change. Furthermore, the law change does not appear to have affected borrowers' default decisions. These results thus cast a cautionary note on the effectiveness of policy recommendations that intend to use deficiency laws to curb mortgage defaults.

Suggested Citation

  • Wenli Li & Florian Oswald, 2014. "Recourse and the Residential Mortgage Market: the Case of Nevada," Working Papers hal-03460402, HAL.
    • Handle: RePEc:hal:wpaper:hal-03460402
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03460402
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    References listed on IDEAS

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    1. Ambrose, Brent W & Capone, Charles A, Jr & Deng, Yongheng, 2001. "Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure," The Journal of Real Estate Finance and Economics, Springer, vol. 23(2), pages 213-234, September.
    2. Clauretie, Terrence M & Herzog, Thomas N, 1990. "The Effect of State Foreclosure Laws on Loan Losses: Evidence from the Mortgage Insurance Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 221-233, May.
    3. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    4. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2013. "The Determinants of Attitudes toward Strategic Default on Mortgages," Journal of Finance, American Finance Association, vol. 68(4), pages 1473-1515, August.
    5. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    6. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
    7. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    8. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
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    Cited by:

    1. Pruszkowski Tomasz, 2017. "Deficiency Judgments as a Mortgage Pricing Factor," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 53(2), pages 57-68, June.

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