Non-recourse mortgage law and housing speculation

Abstract

Borrowers in states with non-recourse mortgage law face limited liability on their mortgage loans. Using a regression discontinuity design at state borders, we show that non-recourse law causes greater increase in housing prices during the U.S. housing boom in the 2000s by encouraging speculative investment demands. Non-recourse states experience greater investment-purpose housing purchases with highly leveraged mortgages during the boom period 2004–2006. We find that the emergence of the originate-to-distribute model enables lenders to effectively shift risk to other investors, thereby promoting excessive loan originations and amplifying the housing price increase in non-recourse states during a boom period.