Mortgage recourse provisions and housing prices

Publication date: Available online 18 July 2018Source: Regional Science and Urban EconomicsAuthor(s): Robert R. Reed, Amanda LaRue, Ejindu S. UmeAbstractIn light of the large swings in housing prices in the United States in recent years, there has been considerable interest in trying to understand the various factors which led to the boom and bust of the housing market. In this paper, we explore the impact of the legal environment from provisions for mortgage default across U.S. states. To do so, we develop a rigorous framework with microeconomic foundations for financial intermediaries. To be specific, we introduce a housing market and a residential mortgage market in the Diamond and Dybvig framework which emphasizes the role of depository institutions to help depositors manage idiosyncratic liquidity risk. Notably, we think of non-recourse provisions as a legal arrangement to protect risk-averse homeowners from the loss of housing value. While housing demand should be higher in markets where mortgage borrowers have full insurance, lenders also adjust the amount of mortgage credit provided to protect their risk-averse depositors. Thus, a priori, there is not an obvious connection between mortgage recourse provisions and housing prices. To draw further insights into the issue, we proceed to look at empirical evidence on housing prices at the MSA-level using the Case-Shiller Home Price Index. Once one controls for regional level unobservables, the evidence suggests that the de...
Source: Regional Science and Urban Economics - Category: Science Source Type: research