Mortgage Design and Slow Recoveries: The Role of Recourse and Default

Pedro Gete and Franco Zecchetto

The Review of Economic Studies, 2024, vol. 91, issue 2, 1039-1084

Abstract: We show that mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities. They cause deeper and more persistent recessions. This mechanism can account for up to 31% of the recovery gap during the Great Recession between the U.S., mostly a non-recourse economy, and Spain, a recourse economy. General equilibrium effects explain most of the differences between mortgage systems. With recourse, highly indebted homeowners dramatically cut consumption in a crisis, and account for a larger share of the aggregate consumption decline. However, without recourse, mortgages would be more expensive for riskier households, and homeownership rates would be lower.

Keywords: Aggregate Demand; Consumption; Default; Europe; Foreclosures; Housing; Liquidity Traps; Mortgages; Nominal Rigidities; Recourse; Recovery (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:91:y:2024:i:2:p:1039-1084.

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