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

We show that mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities and cause deeper and more persistent recessions. This mechanism can account for up to 40% of the recovery gap during the Great Recession between the U.S. (mostly a non-recourse economy) and European economies with recourse mortgage systems. Recourse mortgages also generate larger welfare inequality following credit shocks. General equilibrium effects cause most of the differences across mortgage systems. Liquid assets play a larger role in explaining default with recourse mortgages