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

Alin Marius Andries, Anca Copaciu, Radu Popa and Razvan Vlahu
Authors registered in the RePEc Author Service: Alin Marius Andrieș

Working Papers from DNB

Abstract: We study the impact of changes in recourse legislation on mortgage defaults. Romania provides us with an ideal experimental setting to identify this impact. Using a large dataset of mortgage loans granted between 2003 and 2016, we exploit an exogenous variation in Romanian recourse policy and analyze the behavior of borrowers with mortgages issued under a recourse regime after a change in policy limited lender recourse. We find robust evidence that eliminating penalties for default raises the delinquency probability of existing borrowers, particularly those traditionally considered least likely to default. Our findings highlight the ex-post effects of a switch from a creditor-friendly to a debtor-friendly recourse policy. Broadly, our results point to the importance of assessing borrowers’ default incentives before introducing recourselegislation with retroactive applicability.

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: 2021-10
New Economics Papers: this item is included in nep-law, nep-tra and nep-ure
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