Recourse and (strategic) mortgage defaults Evidence from changes in housing market laws

We study the impact of a legislative change in Romania that retroactively modified mortgage recourse policies, providing a natural experiment to analyze borrower behavior under envolving legal frameworks. Using a granular dataset of mortgage loans originated between 2003 and 2016, combined with individual income tax records, we exploit an exogenous policy shift that transitioned mortgages from a creditor-friendly to a debtor-friendly regime. Our findings provide robust evidence that eliminating penalties for default significantly increased the probability of default among existing borrowers, particularly among high-income individuals and borrowers who are less liquidity-constrained – groups traditionally considered less prone to default. These findings underscore the unintended consequences of retroactive legislative changes, including deteriorated payment discipline and increased strategic default behavior.