Recourse to Non-Housing Assets and Mortgage Credit Supply

Because state anti-deficiency statutes rarely change over time, the opportunity to test the importance of recourse for the mortgage market is limited. I exploit the bankruptcy reform in 2005 (which effectively strengthens recourse) as a quasi-natural experiment to show that aggregate quantity of mortgage lending is increased after the reform is implemented. Lenders appear to adjust their underwriting through approval decision rather than interest rate. Overall, my study finds that strengthening recourse — while potentially useful as a tool to discourage strategic default and foreclosure — can also expand credit supply through increased collateral value.