Fascinating mention buried in Richard Thaler’s Sunday NYT column last week.
He notes that in the non-recourse states, there is an extra $800/$100,000 purchase price built into closing costs for homes. That is the additional costs that lenders incur to make loans in those states, as they implicitly have higher default rates than recourse states.
“The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. That means the mortgage is secured by the home itself; in a default, the lender has no claim on a borrower’s other possessions. Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of giving the lender the keys to the house and walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.
In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.”
Note that this isn’t explicit mortgage insurance, but since it makes the effective cost of doing business higher, it simply gets worked into the fee structure . . .
Underwater, but Will They Leave the Pool?
RICHARD H. THALER
NYT, January 23, 2010