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Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border

Author

Listed:
  • Anil Kumar

Abstract

Texas is the only US state that limits home equity borrowing to 80 percent of home value. This paper exploits this policy discontinuity around Texas' interstate borders and uses a multidimensional regression discontinuity design framework to find that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 1.5 percentage points for all mortgages and 4–5 percentage points for non-prime mortgages. Estimated non-prime mortgage default hazards within 25 to 100 miles on either side of the Texas border are about 20 percent smaller when crossing into Texas.

Suggested Citation

  • Anil Kumar, 2018. "Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 268-297, February.
    • Handle: RePEc:aea:aejpol:v:10:y:2018:i:1:p:268-97
    Note: DOI: 10.1257/pol.20140391
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    Citations

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    Cited by:

    1. William D. Lastrapes & Ian Schmutte & Thor Watson, 2022. "Home equity lending, credit constraints and small business in the US," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 43-63, January.
    2. John V. Duca & Lilit Popoyan & Susan M. Wachter, 2019. "Real Estate And The Great Crisis: Lessons For Macroprudential Policy," Contemporary Economic Policy, Western Economic Association International, vol. 37(1), pages 121-137, January.
    3. Andra C. Ghent & Kristian R. Miltersen & Walter N. Torous, 2020. "Second Mortgages: Valuation and Implications for the Performance of Structured Financial Products," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(4), pages 1234-1273, December.
    4. Gabriel Loumeau, 2020. "Regional Borders, Commuting and Transport Network Integration," KOF Working papers 20-489, KOF Swiss Economic Institute, ETH Zurich.
    5. Anil Kumar & Che-Yuan Liang, 2024. "Labor Market Effects of Credit Constraints: Evidence from a Natural Experiment," American Economic Journal: Economic Policy, American Economic Association, vol. 16(3), pages 1-26, August.
    6. Moulton, Stephanie & Haurin, Donald R. & Shi, Wei, 2015. "An analysis of default risk in the Home Equity Conversion Mortgage (HECM) program," Journal of Urban Economics, Elsevier, vol. 90(C), pages 17-34.
    7. Andreas Fuster & Benedict Guttman-Kenney & Andrew F. Haughwout, 2018. "Tracking and stress-testing U.S. household leverage," Economic Policy Review, Federal Reserve Bank of New York, issue 24-1, pages 35-63.
    8. Zuanjiu Zhou & Zhong Liu, 2023. "The Impact of Place-Based Policies on Firm Performance: Evidence from China," Sustainability, MDPI, vol. 15(8), pages 1-19, April.
    9. Rahul Singh & Moses Stewart, 2025. "Placebo Discontinuity Design," Papers 2507.12693, arXiv.org.
    10. Mauricio Villamizar‐Villegas & Freddy A. Pinzon‐Puerto & Maria Alejandra Ruiz‐Sanchez, 2022. "A comprehensive history of regression discontinuity designs: An empirical survey of the last 60 years," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 1130-1178, September.
    11. Nam, Tong-yob & Oh, Seungjoon, 2021. "Non-recourse mortgage law and housing speculation," Journal of Banking & Finance, Elsevier, vol. 133(C).
    12. Xun Bian & Zhenguo Lin & Feifei Zhu, 2024. "Housing leverage, home value, and retirement," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 52(4), pages 1103-1139, July.
    13. Franz, Thorsten, 2019. "Monetary policy, housing, and collateral constraints," Discussion Papers 02/2019, Deutsche Bundesbank.
    14. Steven Laufer, 2018. "Equity Extraction and Mortgage Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 1-33, April.
    15. Giuntella, Osea & Mazzonna, Fabrizio, 2019. "Sunset time and the economic effects of social jetlag: evidence from US time zone borders," Journal of Health Economics, Elsevier, vol. 65(C), pages 210-226.
    16. Benjamin S. Kay & Albina Khatiwoda, 2025. "Challenging Demographic Representativeness at State Borders: Implications for Policy Research," Finance and Economics Discussion Series 2025-018, Board of Governors of the Federal Reserve System (U.S.).
    17. Darren K. Hayunga & R. Kelley Pace & Shuang Zhu, 2019. "Borrower Risk and Housing Price Appreciation," The Journal of Real Estate Finance and Economics, Springer, vol. 58(4), pages 544-566, May.
    18. Ibtihal Ferwana & Suyoung Park & Ting-Yi Wu & Lav R. Varshney, 2023. "Designing Discontinuities," Papers 2305.08559, arXiv.org, revised Dec 2023.
    19. Benetton, Matteo & Kudlyak, Marianna & ,, 2022. "Dynastic Home Equity," CEPR Discussion Papers 17464, C.E.P.R. Discussion Papers.
    20. Bahadir, Berrak & Gumus, Inci & Schaffer, Matthew, 2024. "Does relaxing household credit constraints hurt small business lending? Evidence from a policy change in Texas," Journal of Corporate Finance, Elsevier, vol. 89(C).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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