Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200827
Authors: 
Rhee, Keeyoung
Year of Publication: 
2018
Citation: 
[Journal:] KDI Journal of Economic Policy [ISSN:] 2586-4130 [Volume:] 40 [Year:] 2018 [Issue:] 3 [Pages:] 69-89
Abstract: 
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.
Subjects: 
Non-recourse Mortgage
Strategic Default
Adverse Selection
JEL: 
D82
G18
G21
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-sa/4.0/
Document Type: 
Article

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