House price dynamics and mortgage defaults: the role of recourse

This paper investigates the relationship between house prices and mortgage defaults in recourse and non-recourse US metropolitan areas. The theoretical analysis shows that shocks to house price returns have a stronger effect on defaults in non-recourse markets than in recourse markets due to strategic default behaviour. Empirical evidence from a panel vector autoregressive (Panel VAR) model supports this prediction and, in addition, reveals a stronger house price response to defaults in non-recourse markets than predicted by the theoretical model. The findings highlight key differences in mortgage default dynamics across recourse and non-recourse markets, offering insights for households, lenders, policymakers and regulators.