Thursday, December 4, 2008

Will Adding Recourse Provisions Improve Loan Performance?

There’s a very thoughtful criticism of Martin Feldman’s proposal to tie recourse provisions to loan modifications at Credit Slips. I think the post's criticism of Feldman's proposal is right on. I would add, I don't think there is any evidence to support the contention recourse loans perform better than non-recourse loans. One place to look for such evidence is loans which have subordinate home equity lines. Those lines are invariably recourse and in theory should perform better, but in fact they don't. The reality is that borrowers tend to pay until they can't, and at that point it doesn't matter if the loan is recourse or not, because there is nothing left to go after. I've written about why that's the case in the income property context here, and I think the logic is the same for home loans.