Remarkably, default rates in Ireland and Spain in 2009, while high by historical standards at 3.6 and 2.9 percent respectively, were substantially lower than in the United States, where the default rate was 13 percent (see Fiorante and Mortgage Bankers Association of America). Dwight Jaffee has argued that this difference in performance is the result of the fact that mortgages in Europe give lenders recourse to the borrower. I find it plausible that recourse matters, but not that it matters quite so much. For example, while purchase money loans in California are non-recourse, refinance loans are not. The preponderance of mortgages in California are refinance loans, and California's default rate is extraordinarily high.
So why haven't borrowers in Spain and Ireland defaulted more? According to the European Mortgage Federation, more than 80 percent of loans in Spain and Ireland are variable rate mortgages. As a consequence, as market interest rates fell, so too did mortgage interest rates. The typical mortgage borrower in Ireland and Spain is currently paying considerable less than 4 percent on their mortgage.