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Financial literacy and mortgage equity withdrawals

  • John V. Duca
  • Anil Kumar

The recent U.S. consumption boom and the subsequent surge in mortgage defaults have been linked to mortgage equity withdrawals (MEWs). MEWs are correlated with covariates consistent with a permanent income framework augmented for credit-constraints. Nevertheless, many households are financially illiterate. We assess the unexplored linkages between “active MEW” and measures of financial literacy using panel data from the Health and Retirement Study (HRS). Findings indicate that declines in mortgage interest rates encouraged MEWs. Nevertheless, financially illiterate households were significantly more likely to withdraw housing equity via traditional first or second mortgages (including cash-out mortgage refinancings but not home equity loans).> ; We find that the financially less savvy are 3–5 percentage points more likely to engage in this type of MEW relative to those who answered financial literacy questions correctly. Also significant were state differences in debtor versus creditor interests in bankruptcy, with loan demand effects outweighing loan supply effects across states.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/2011/wp1110.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1110.

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Date of creation: 2011
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Handle: RePEc:fip:feddwp:1110
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