How Non-Recourse Mortgages Can Drive Default Rates Up

Tim Worstall leaves an interesting comment on my Jim Cramer post:

One thing about US mortgages that does surprise a Brit like me. Usually, (depends upon the State) they are "only" secured by the property, at least for a first mortgage. So if the mortgage is higher than the value of the house, the (soon to be ex-) owner can walk away leaving both the house and the debt with the bank. That's very different from hte negative equity we had in the UK in the early 90s, when you might lose the house and "still" owe the further amount of the mortgage.
Whether there's a word for this situation I'm not sure, but fungible certainly isn't it.

There is a word for this, and it's "non-recourse". Tim is quite right that in some states, mortgages can be non-recourse – which means that Cramer's strategy of "walking away" from a house with negative equity can make a certain amount of short-term financial sense.

Let's take an extreme example: let's say you're wealthy, and have a couple of million dollars floating around in liquid assets. You bought your $1 million condo at the height of the Miami property boom, with 10% down, and it's now worth maybe $750,000 – much less than your $900,000 non-recourse mortgage. (I have no idea whether non-recourse mortgages exist in Florida; let's say they do.)

In this case, you can walk away from your condo – maybe you'll go to your summer house in Maine for a couple of months. The bank sells the condo for whatever it can get for it, and your $900,000 debt is wiped out. Then you return to Miami, and buy an identical condo – maybe even the exact same one – for $750,000 in cash. (Having already defaulted on one mortgage, you're not going to find it easy to get another.) Presto, you've just made $150,000.

In more normal circumstances, things aren't quite as cut-and-dried. Real people care a lot about their credit rating, which will get trashed if they default on their mortgage. Indeed, if you don't have the cash to buy a new home, it's very hard even to rent somewhere if you have atrocious credit. But intuitively it makes sense that default rates on non-recourse mortgages are going to rise more than on normal mortgages when people find themselves in a negative equity situation.

So the multi-billion-dollar question is this: What proportion of ARMs is non-recourse? My guess is that it's quite low. But I have no data on this question at all. Can anybody help me out?