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Equity Extraction and Mortgage Default

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  • Steven Laufer

    (Federal Reserve Board)

Abstract

Using a property-level data set of houses in Los Angeles County, I estimate that about 15% of the recent surge in mortgage defaults is attributable to early cohorts of homebuyers who would not have defaulted had they not borrowed against the rising value of their homes during the boom. I develop and estimate a structural model capable of explaining the patterns of both equity extraction and default observed among this group of homeowners. In the model, households who have taken out equity have both higher loan-to-value ratios and increased mortgage payments relative to their income, a combination that makes them more likely to default. Using this model to analyze a policy that limits the maximum size of cash-out refinances to 80% of the current house value, I find that this restriction would reduce defaults by 18%, partially by inducing households to purchase less expensive homes. (Copyright: Elsevier)

Suggested Citation

  • 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.
  • Handle: RePEc:red:issued:15-201
    DOI: 10.1016/j.red.2017.07.006
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How many mortgage defaults resulted from lofty expectations?
      by Economic Logician in Economic Logic on 2013-07-29 20:02:00

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    Cited by:

    1. M. Dietsch & C. Welter-Nicol, 2014. "Do LTV and DSTI caps make banks more resilient?," Débats économiques et financiers 13, Banque de France.
    2. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters, in: Housing and the Financial Crisis, pages 235-299, National Bureau of Economic Research, Inc.
    3. Eugene Amromin & Caitlin Kearns, 2014. "Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition," Working Paper Series WP-2014-25, Federal Reserve Bank of Chicago, revised 30 Nov 2014.
    4. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.),Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.
    5. Charles Ka Yui Leung & Joe Cho Yiu Ng, 2018. "Macro Aspects of Housing," GRU Working Paper Series GRU_2018_016, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    6. Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    7. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    8. Arito Ono & Hirofumi Uchida & Gregory Udell & Iichiro Uesugi, 2014. "Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios," Working Papers e070, Tokyo Center for Economic Research.
    9. Arthur Korteweg & Morten Sorensen, 2012. "Estimating Loan-to-Value and Foreclosure Behavior," NBER Working Papers 17882, National Bureau of Economic Research, Inc.
    10. 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.
    11. Sodini, Paolo & van Nieuwerburgh, Stijn & Vestman, Roine & von Lilienfeld-Toal, Ulf, 2016. "Identifying the Benefits from Home Ownership: A Swedish Experiment," CEPR Discussion Papers 11656, C.E.P.R. Discussion Papers.
    12. Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
    13. 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.
    14. Wadud, Mokhtarul & Ali Ahmed, Huson Joher & Tang, Xueli, 2020. "Factors affecting delinquency of household credit in the U.S.: Does consumer sentiment play a role?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

    More about this item

    Keywords

    Mortgages; Equity extraction; Mortgage default;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

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