House Price Dynamics and Mortgage Defaults: Theoretical and Empirical Analysis of the Role of Recourse

Abstract

This paper examines the dynamics of house prices and mortgage defaults in recourse and non recourse U.S. metropolitan areas. Within an overlapping generations model, we demonstrate that house price shocks result in higher default rates in non-recourse markets. While both markets exhibit negative house price reaction to mortgage defaults, the response is stronger in non-recourse markets. Our findings highlight the critical role of recourse in determining mortgage default and house price risk.