IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/1410.html
   My bibliography  Save this paper

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 the 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 percentage point for all mortgages and 2-4 percentage points for nonprime mortgages. Estimated nonprime mortgage default hazards within 25 to 100 miles on either side of the Texas? border are about 15 percent smaller as one crosses into Texas.

Suggested Citation

  • Anil Kumar, 2014. "Do restrictions on home equity extraction contribute to lower mortgage defaults? evidence from a policy discontinuity at the Texas border," Working Papers 1410, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1410
    DOI: 10.24149/wp1410
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/-/media/documents/research/papers/2014/wp1410.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.24149/wp1410?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alexandre Belloni & Victor Chernozhukov & Christian Hansen, 2014. "High-Dimensional Methods and Inference on Structural and Treatment Effects," Journal of Economic Perspectives, American Economic Association, vol. 28(2), pages 29-50, Spring.
    2. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation of Elementary Education," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 577-599.
    3. Huang, Rocco R., 2008. "Evaluating the real effect of bank branching deregulation: Comparing contiguous counties across US state borders," Journal of Financial Economics, Elsevier, vol. 87(3), pages 678-705, March.
    4. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs In Economics," Working Papers 1118, Princeton University, Department of Economics, Industrial Relations Section..
    5. 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.
    6. Robinson, Peter M, 1988. "Root- N-Consistent Semiparametric Regression," Econometrica, Econometric Society, vol. 56(4), pages 931-954, July.
    7. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    8. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, vol. 142(2), pages 615-635, February.
    9. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(2), pages 238-249, April.
    10. Patrick Bayer & Fernando Ferreira & Robert McMillan, 2007. "A Unified Framework for Measuring Preferences for Schools and Neighborhoods," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 588-638, August.
    11. Donghoon Lee & Christopher Mayer & Joseph Tracy, 2012. "A New Look at Second Liens," NBER Chapters, in: Housing and the Financial Crisis, pages 205-234, National Bureau of Economic Research, Inc.
    12. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(2), pages 233-263, June.
    13. David Card & Lara D. Shore-Sheppard, 2004. "Using Discontinuous Eligibility Rules to Identify the Effects of the Federal Medicaid Expansions on Low-Income Children," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 752-766, August.
    14. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316, September.
    15. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 313-336, June.
    16. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(4), pages 1511-1560.
    17. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 1253-1296.
    18. Campbell, John Y. & Cocco, Joao F., 2007. "How do house prices affect consumption? Evidence from micro data," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 591-621, April.
    19. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 763-789.
    20. Neil Bhutta & Jane K. Dokko & Hui Shan, 2010. "The depth of negative equity and mortgage default decisions," Finance and Economics Discussion Series 2010-35, Board of Governors of the Federal Reserve System (U.S.).
    21. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    22. Agarwal, Sumit & Ambrose, Brent W. & Liu, Chunlin, 2006. "Credit Lines and Credit Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 1-22, February.
    23. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
    24. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    25. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
    26. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    27. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
    28. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
    29. Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May.
    30. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-209, January.
    31. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    32. A. Belloni & D. Chen & V. Chernozhukov & C. Hansen, 2012. "Sparse Models and Methods for Optimal Instruments With an Application to Eminent Domain," Econometrica, Econometric Society, vol. 80(6), pages 2369-2429, November.
    33. Chadi S. Abdallah & William D. Lastrapes, 2012. "Home Equity Lending and Retail Spending: Evidence from a Natural Experiment in Texas," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 94-125, October.
    34. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
    35. Stephen G. Donald & Kevin Lang, 2007. "Inference with Difference-in-Differences and Other Panel Data," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 221-233, May.
    36. Melissa Dell, 2010. "The Persistent Effects of Peru's Mining Mita," Econometrica, Econometric Society, vol. 78(6), pages 1863-1903, November.
    37. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    38. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
    39. Daniel Cooper, 2013. "House Price Fluctuations: The Role of Housing Wealth as Borrowing Collateral," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1183-1197, October.
    40. Julapa Jagtiani & William W. Lang, 2010. "Strategic default on first and second lien mortgages during the financial crisis," Working Papers 11-3, Federal Reserve Bank of Philadelphia.
    41. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    42. Karen M. Pence, 2006. "Foreclosing on Opportunity: State Laws and Mortgage Credit," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 177-182, February.
    43. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas D. Evanoff, 2010. "Learning to Cope: Voluntary Financial Education and Loan Performance during a Housing Crisis," American Economic Review, American Economic Association, vol. 100(2), pages 495-500, May.
    44. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
    45. Campbell, Tim S & Dietrich, J Kimball, 1983. "The Determinants of Default on Insured Conventional Residential Mortgage Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1569-1581, December.
    46. Engelhardt, Gary V, 1996. "Consumption, Down Payments, and Liquidity Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 255-271, May.
    47. Anil Kumar & Edward C. Skelton, 2013. "Did home equity restrictions help keep Texas mortgages from going underwater?," Southwest Economy, Federal Reserve Bank of Dallas, issue Q3, pages 3-7.
    48. Arindrajit Dube & T. William Lester & Michael Reich, 2010. "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 945-964, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gabriel Loumeau, 2020. "Regional Borders, Commuting and Transport Network Integration," KOF Working papers 20-489, KOF Swiss Economic Institute, ETH Zurich.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Matteo Benetton & Marianna Kudlyak & John Mondragon, 2022. "Dynastic Home Equity," Working Paper Series 2022-13, Federal Reserve Bank of San Francisco.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    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. 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.).
    14. Ibtihal Ferwana & Suyoung Park & Ting-Yi Wu & Lav R. Varshney, 2023. "Designing Discontinuities," Papers 2305.08559, arXiv.org, revised Dec 2023.
    15. 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.
    16. Nam, Tong-yob & Oh, Seungjoon, 2021. "Non-recourse mortgage law and housing speculation," Journal of Banking & Finance, Elsevier, vol. 133(C).
    17. Franz, Thorsten, 2019. "Monetary policy, housing, and collateral constraints," Discussion Papers 02/2019, Deutsche Bundesbank.
    18. 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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    2. 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.
    3. 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," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    4. Samuel Dodini & Donald R. Haurin & Stephanie Moulton & Maximilian D. Schmeiser, 2015. "How House Price Dynamics and Credit Constraints affect the Equity Extraction of Senior Homeowners," Finance and Economics Discussion Series 2015-70, Board of Governors of the Federal Reserve System (U.S.).
    5. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    6. 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.
    7. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
    8. Guido Blasio & Samuele Poy, 2017. "THE IMPACT OF LOCAL WAGE REGULATION ON EMPLOYMENT: A BORDER ANALYSIS FROM ITALY IN THE 1950s," Journal of Regional Science, Wiley Blackwell, vol. 57(1), pages 48-74, January.
    9. Baum-Snow, Nathaniel & Ferreira, Fernando, 2015. "Causal Inference in Urban and Regional Economics," 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 3-68, Elsevier.
    10. Nam, Tong-yob & Oh, Seungjoon, 2021. "Non-recourse mortgage law and housing speculation," Journal of Banking & Finance, Elsevier, vol. 133(C).
    11. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    12. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
    13. Pei Li & Yi Lu & Tuan-Heww Sng, 2017. "Artificial Administrative Boundaries: Evidence from China," CEH Discussion Papers 09, Centre for Economic History, Research School of Economics, Australian National University.
    14. Andrieș, Alin Marius & Copaciu, Anca & Popa, Radu & Vlahu, Razvan, 2025. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," European Economic Review, Elsevier, vol. 173(C).
    15. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    16. Ebner, André, 2013. "A micro view on home equity withdrawal and its determinants: Evidence from Dutch households," Journal of Housing Economics, Elsevier, vol. 22(4), pages 321-337.
    17. Thomas Schelkle, 2018. "Mortgage Default during the U.S. Mortgage Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1101-1137, September.
    18. Yusuf VARLI & Gökhan ÖVENÇ, 2019. "Dynamic Analysis of Defaults and Prepayments in the Turkish Mortgage Market," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(39).
    19. Raffaello Bronzini & Eleonora Iachini, 2014. "Are Incentives for R&D Effective? Evidence from a Regression Discontinuity Approach," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 100-134, November.
    20. M. Dietsch & C. Welter-Nicol, 2014. "Do LTV and DSTI caps make banks more resilient?," Débats Economiques et financiers 13, Banque de France.

    More about this item

    Keywords

    ;
    ;
    ;

    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
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:1410. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.