Recourse and residential mortgages: The case of Nevada


The state of Nevada abolished deficiency judgments for purchase mortgage loans made after October 2009 and collateralized by primary single family homes. In this paper we test the effect of the law change on mortgage supply and demand in addition to mortgage default. Using unique mortgage loan level application and performance data, we find strong evidence that lenders tightened their lending standards in response to the law change. Particularly, lenders reduced approval rates and loan sizes for affected mortgages by about 5 percent. Households, by contrast, did not increase their mortgage applications because of the law change. More importantly, the law change did not appear to have affected mortgage default and house foreclosure outcomes. These results thus cast a cautionary note on the effectiveness of policy recommendations that intend to use deficiency laws to curb mortgage defaults.

Journal of Urban Economics