Non-Recourse Mortgages and Credit Market Breakdowns: A Framework for Policy Analysis

This paper illustrates that the legal structure of mortgage credit, in particular, its status in terms of recourse in foreclosure, can lead not only to the familiar problem of adverse selection but multiple equilibria in the credit market with the possibility of a small exogenous shock leading to a major breakdown in the credit market with the supply of credit drying up. As such, it tries to shed light on the recent sub-prime crisis; and suggests lessons for emerging economies drafting regulation for modern financial markets so as to prevent meltdowns. URL: [http://finmin.nic.in/WorkingPaper/Mortgages_Financial_Crashes.pdf]