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Non-recourse mortgage law and housing speculation

Tong-yob Nam and Seungjoon Oh

Journal of Banking & Finance, 2021, vol. 133, issue C

Abstract: Borrowers in states with non-recourse mortgage law face limited liability on their mortgage loans. Using a regression discontinuity design at state borders, we show that non-recourse law causes greater increase in housing prices during the U.S. housing boom in the 2000s by encouraging speculative investment demands. Non-recourse states experience greater investment-purpose housing purchases with highly leveraged mortgages during the boom period 2004–2006. We find that the emergence of the originate-to-distribute model enables lenders to effectively shift risk to other investors, thereby promoting excessive loan originations and amplifying the housing price increase in non-recourse states during a boom period.

Keywords: Non-recourse mortgage law; Limited liability; Housing speculation; State border discontinuity; Originate-to-distribute (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 K11 R30 R31 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jbankfin.2021.106292

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