The Reform of Mortgage Liability

With the current economic crisis, proposals for legally limiting mortgage borrowers’ liability have abounded in Spain. These pages examine whether such proposals are reasonable or unreasonable from an economic standpoint. The conclusion is that it would be unfair and reckless with respect to the mortgage loans that have already been signed, rashly attacking against the rule of law at a time when such an attack would fan doubts about the solvency of our public finances and the strength of our institutions. It would also be a serious mistake for future loans: In Spain, as in nearly the entire developed world, lenders and borrowers prefer to contract mortgage loans “with recourse”, that is, without any limitation on liability, so one must conclude that this is beneficial to them, especially when there is considerable competition among lenders. In addition, this exercise of freedom of contract does not cause any damage to third-party injuries, which might justify its prohibition. On the contrary, limiting liability would produce serious systemic damage, as shown by the evidence of the US’s eleven recourse states.