Abstract
Given the growth in home equity lending during the 1990s, it is imperative that lenders and regulators understand the risks associated with this segment of the residential mortgage market. This paper addresses this need through analysis of a unique panel data set of over 135,000 homeowners with second mortgages. Our analysis indicates that significant differences exist in the prepayment and default probabilities of home equity loans and lines. We find that households with equity loans are relatively more sensitive to changes in interest rates. On the other hand, households with equity lines are more sensitive to appreciation in property value. Our analysis offers insights into bank minimum capital requirements associated with home equity credit lending.
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