The Effects of Non-Recourse Mortgages on Default Risks and Households' Surplus

Artikel

We study whether a default option attached to non-recourse mortgages improves borrowers' surplus from mortgage financing. By defaulting on mortgage debt, borrowers can save their non-collateralized income from being foreclosed. In exchange, borrowers must forgo non-monetary surplus from retaining any collateral. Banks may charge a high mortgage rate due to increased default rates. We find that the interest rate of non-recourse mortgage decreases with the borrower's surplus from home ownership. Moreover, non-recourse mortgages benefit only borrowers who deem housing property as an investment asset. Hence, the transition to a non-recourse mortgage is detrimental to welfare if the borrower enjoys a large surplus from home ownership. Although the borrower privately knows how much surplus she enjoys from home ownership, a menu of non-recourse mortgage contracts may exist, yielding a separating equilibrium without information rent.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: KDI Journal of Economic Policy ; ISSN: 2586-4130 ; Volume: 40 ; Year: 2018 ; Issue: 3 ; Pages: 69-89 ; Sejong: Korea Development Institute (KDI)

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; General Financial Markets: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Non-recourse Mortgage ; Strategic Default ; Adverse Selection

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Rhee, Keeyoung
• Event: Veröffentlichung
• (who): Korea Development Institute (KDI)
• (where): Sejong
• (when): 2018

Further information

• DOI: doi:10.23895/kdijep.2018.40.3.69
• Handle: http://hdl.handle.net/10419/200827
• Last update: 10.03.2025, 11:45 AM CET