Tag: recourse

  • Getting Rid of Nonrecourse Mortgages?

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    Adam Levitin

    It's interesting to look at some of the reader comments to the NY Times article about the rich being more likely to default on their mortgages.  A lot of them are aghast that a mortgage might not be full recourse–that one can walk away and have no personal liability.  What happened to one's word being their bond, honor, etc?  

    Since the onset of the mortgage crisis, some commentators (starting with Martin Feldstein in 2008) have been discovering to their horror that a lot of mortgage lending is nonrecourse.  They think this situation is an invitation to moral hazard and argue that we should do away with nonrecourse mortgages and otherwise punish strategic defaulters (without ever saying how we identify a strategic default–not everyone who walks away from an underwater property is a strategic defaulter…)  Putting aside the issue that a lot of mortgages are recourse, I don't think these commentators have fully thought through the implications of doing so.  

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  • Are the Rich More Likely to Default on Their Mortgages?

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    Adam Levitin

    The NY Times has an article about mortgage default rates being higher on larger (>$1M) mortgages than on small mortgages.  The argument suggested by the article is that the rich are more likely to see their homes simply as investments.  Put a different way, the consumption utility component of the home is relatively less important to the rich.  A house has two value components–it's an investment, and it is also a consumable (but durable) product.   The consumption value of a home is basically the same for everyone–I might derive more or less utility from any particular house, but it is all within a relatively constrained range, and my range is probably around the same as everyone else's.  That means that the consumption value component of a house is largely fixed, regardless of the house's price.  The more expensive the house, the smaller the ratio of the consumption value to the investment value.  Therefore, it would follow that people with more expensive houses place more value on the investment component and treat the house more like an investment.  

    I think that's correct, but I also think there's more going on and wish that the analysis in the article had dug deeper because it has unfortunately fed into a narrative of the mortgage crisis being one of strategic default by ruthless investors, with the corollary being that they do not merit any government assistance and even deserve opprobrium or punishment (although they are only playing by the rules of the game, which should have been priced in by lenders).  Here's what I wish the story had pointed out:

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  • The Role of Recourse in Foreclosures

    Posted by

    Adam Levitin

    Martin Feldstein has been pushing a mortgage bailout proposal that has been getting some undeserved attention (see here and here, e.g.).  Feldstein gets  (here, and here)
    how central negative equity is to the economic crisis.  Homeowners with
    negative equity have a reduced incentive to stay in their home if the
    mortgage is burdensome.  Negative equity fuels foreclosures, which in
    turn force down housing prices, setting off a downward spiral.
    Feldstein is right to focus on negative equity as a key issue for
    housing market stabilization. The problem is in his solution–it is based on a few erroneous factual premises, all of which could have been discovered with very limited Google searches. 

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