Mortgage Design and Slow Recoveries: The Role of Recourse and Default.

The article investigates how mortgage recourse systems—where borrowers remain liable for mortgage deficiencies after foreclosure—affect macroeconomic dynamics during liquidity traps, such as the Great Recession. Using a quantitative general equilibrium model calibrated to the U.S. (mostly non-recourse) and Spain (recourse) economies, it finds that recourse mortgages discourage default, leading to deeper and more persistent recessions by amplifying declines in house prices, consumption, output, and increasing unemployment. While non-recourse mortgages facilitate default that acts as debt relief and supports aggregate demand, recourse systems increase financial fragility by enabling higher leverage among poorer households and reducing consumption smoothing. The model also shows that these effects account for up to 31% of the consumption recovery gap observed between the U.S. and Spain, and that these findings hold even when accounting for differences in welfare systems and alternative fiscal and monetary policies.