Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws

Alin Marius Andrieș, Anca Copaciu, Radu Popa and Razvan Vlahu

European Economic Review, 2025, vol. 173, issue C

Abstract: We study the impact of a legislative change in Romania that retroactively modified mortgage recourse policies, providing a natural experiment to analyze borrower behavior under envolving legal frameworks. Using a granular dataset of mortgage loans originated between 2003 and 2016, combined with individual income tax records, we exploit an exogenous policy shift that transitioned mortgages from a creditor-friendly to a debtor-friendly regime. Our findings provide robust evidence that eliminating penalties for default significantly increased the probability of default among existing borrowers, particularly among high-income individuals and borrowers who are less liquidity-constrained – groups traditionally considered less prone to default. These findings underscore the unintended consequences of retroactive legislative changes, including deteriorated payment discipline and increased strategic default behavior.

Keywords: Mortgage market; Recourse; Mortgage default; Moral hazard; Negative equity (search for similar items in EconPapers)
JEL-codes: G21 G28 K11 R20 R30 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:173:y:2025:i:c:s0014292125000042

DOI: 10.1016/j.euroecorev.2025.104953

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