Equity Extraction Research Articles

Housing leverage, home value, and retirement

AbstractWe study the effect of housing leverage, measured using the loan‐to‐value (LTV) ratio, on homeowners' retirement decisions. We find that in general, elevated LTV ratios delay retirements. By decomposing the changes of the current LTV ratio into (1) equity extractions, (2) equity build‐up, (3) home value increases, and (4) home value decreases, we find that equity extractions and declining home value drive the negative relationship between housing leverage and retirement. In contrast, retirement decisions are less responsive to equity build‐up and home value appreciation. Our results suggest that the influence of housing leverage on retirement decisions is path‐dependent and asymmetric. We also find that transitions into retirement are more sensitive to home price declines, and retirement reversals are often triggered by equity extraction. Further analyses also reveal that the impact of housing leverage on retirement differs by household age and financial constraints, and it also varies across different stages of a housing market cycle.

How Do Households Respond to Job Loss? Lessons from Multiple High-Frequency Datasets

How much and through which channels do households self-insure against job loss? Combining data from a large bank and from government sources, we quantify a broad range of responses to job loss in a unified empirical framework. Cumulated over a two-year period, households reduce spending by 30 percent of their income loss. They mainly self-insure through adjustments of liquid balances, which account for 50 percent of the income loss. Other channels—spousal labor supply, private transfers, home equity extraction, mortgage refinancing, and consumer credit—contribute less to self-insurance. Both overall self-insurance and the channels vary with household characteristics in intuitive ways. (JEL D12, G21, G51, J64, J65)

Import Competition and Household Debt

ABSTRACTWe analyze the effect of import competition on household balance sheets using individual data on consumer finances. We exploit variation in local industry exposure to foreign competition to study households' response to the income shock triggered by China's accession to the World Trade Organization. We show that household debt increases significantly in regions where manufacturing industries are more exposed to import competition. The effects are driven by home equity extraction and are concentrated in areas with strong house price growth. Our results highlight the role played by mortgage markets in absorbing displacement shocks triggered by globalization.

Dynastic Home Equity

Using a nationally representative panel of consumer credit records for the US from 1999 to 2021, we document a positive correlation between child and parent homeownership. We propose a new causal mechanism behind this relationship based on parents extracting home equity to help finance their child's home purchase and quantify this mechanism in several ways. First, controlling for cohort, zip code, age, and the creditworthiness of parents and children, we find that children whose parents extract equity are 60% more likely to become a homeowner than children whose homeowner-parents do not extract equity. Second, using an event study approach, we find that the increase in child homeownership occurs almost entirely in the year when parents extract equity. Third, using variation in equity extraction induced by households near leverage constraints, we find parental equity extraction increases the child's probability of becoming a homeowner by about five times. Our results highlight the importance of familial wealth for household wealth accumulation and housing wealth in particular. A back-of-the-envelope calculation suggests that dynastic home equity increases housing wealth inequality among young adults by 20%.

Tapping Home Equity: Income and Spending Trends Around Cash-Out Refinances and HELOCs

Approximately two thirds of American families own a home and for most homeowners, their house is also their most important source of wealth. Homeowners are currently sitting on historically high levels of home equity and the potential withdrawal of this home equity has important implications for consumption at the macroeconomic and household levels. In this report, we examine the extent to which liquidating home equity boosts consumption, as well as how income dynamics around equity extraction may play a role in influencing households’ decision to draw from this source of wealth. Using loan-level servicing data from Chase mortgage customers combined with corresponding Chase deposit account data from 2012 to 2018, we create a sample of more than 50,000 homeowners who either obtained a cash-out refinance or drew on a home equity line of credit (HELOC). We find that for homeowners who cash-out refinanced, most refinanced into a lower interest rate but a higher monthly payment because of a larger loan balance. Also, after controlling for secular trends, homeowners who obtained a cash-out refinance had no change in income whereas homeowners who extracted equity via a HELOC experienced declining income. For both groups, consumption spiked considerably as soon as the liquidated equity flowed into the bank account but quickly settled to steady state-levels at a higher level, 5 percent and 7 percent above baseline for HELOCs and cash-out refinances, respectively. After one year, cash-out refinance homeowners spent 33 percent of their total equity extracted while those with a HELOC spent 47 percent overall. For both sample groups, these marginal propensities to consume (MPCs) were highest for younger homeowners and those with higher loan-to-values (LTVs). Taken together, these findings have important implications for macroeconomic and housing policies.

International Real Estate Review

This paper investigates two types of housing wealth effects: conventional housing wealth and collateral. We incorporate home equity extraction (HEE) and the influence of mortgage liberalization into the model in Campbell and Mankiw (1989). Based on U.S. data during the 1977Q1–2019Q4, our empirical results suggest that consumption is remarkably influenced by the use of HEE, rather than home equity. Furthermore, the rapid expansion of mortgage securitization significantly amplifies the collateral effect. Conditional on the use of HEE and the share of non-bank mortgage holdings, housing wealth has an average marginal propensity to consume (MPC) of 0.84 cents and a maximum MPC of 6.06 cents. In 2007, when market-based mortgage pools and issuers of asset-backed securities held more than 60% of home mortgages, the HEE shock explained for over 50% of the forecasting variance of consumption growth. The results provide evidence that with a focus on collateral value, lenders allow more equity withdrawal, which leads to higher consumption.

Anticipating a Reverse Mortgage Adoption in Croatia

Abstract Reverse mortgage is an alternative source of financing of elderly population that usually has some homeownership, but insufficient income and savings to support desired or indispensable level of consumption. It is a financial innovation mostly provided by banks and finance companies to seniors, which enables a home equity conversion to liquidity without selling or leaving a property. In circumstances of ageing society, modest pension income, increasing long-care expenditures, limited access to loan market and high risk of poverty, a reverse mortgage product has a solid ground for implementation and adoption. Croatia is an ageing country with negative demographic trends, which accelerated in the last few years. Retired population which is “home rich and cash poor” is particularly vulnerable and at strike to sustain a decent life. Therefore, we raised a question concerning the justification of the reverse mortgage introduction in Croatia. After giving an insight into some contextual factors, an estimation of the potential demand for reverse mortgage service in Croatia was made by carrying out an exploratory – pilot study with around 120 questionnaire respondents. We found out that there is a poor knowledge about the reverse mortgage among Croatian financial consumers (i.e. only 24% of respondents are familiar with the reverse mortgage term), as well as the lack of demand for this home equity extraction instrument. Namely, almost 67% of respondents would not accept a reverse mortgage instrument regardless of the circumstances, primarily due to socio-cultural reasons.

Can Changing Demographics or Refinancing Behaviors Explain the Rising Levels of Housing Debt Among Older Americans?

ABSTRACT The share of older households with debt secured by their primary residence more than doubled between 1995 and 2016. This study uses the Survey of Consumer Finances (SCF) to examine the sources of this shift. The empirical analyses first use a series of regressions to examine the relative influence of several hypothesized demographic contributors. The results suggest that these factors explain approximately one quarter of the increase in housing debt. The remainder is shown to be attributable to factors that affect the incidence of housing debt conditional on homeownership and the number of years that households have owned their homes, such as equity extraction, refinancing, and extended financing terms. The detailed loan information in the SCF further suggests that rate refinancing and associated term extensions may be an overlooked contributor to the rise in housing debt.

Resilient homeownership: how partnership-based finance would have prevented the 2008 US mortgage crisis

Purpose The purpose of this study is to demonstrate that the conventional mortgage system is not appropriate for household finance because it encourages equity extraction and excessive leverage during housing boom and leads to negative equity during a housing bust, a situation that translates into mortgage defaults and foreclosures. Home financing could alternatively be structured as a diminishing partnership preventing the homeowner from ever having negative equity. Design/methodology/approach Using Johansen’s cointegration test, the authors provide evidence of a long-run relationship between the delinquency rates, volume of refinancing and the change in house price index (HPI) during the 1994–2019 period. To unravel the short run dynamics between these variables, the authors used a Granger causality test that concludes that the volume of refinancing and the change in the HPI Granger cause default rates. Findings The authors provide evidence that under the current conventional mortgage system, excessive refinancing opportunities and equity extraction that are the main factors determining delinquency rates leading to a non-sustainable homeownership. Practical implications If mortgages were such that they do not incentivize defaults and foreclosures during a housing downturn, the recovery of the housing market always leads to capital gains. Therefore, disincentivizing refinancing and equity extraction would lead to a more sustainable homeownership. Social implications Households would be encouraged to pursue sustainable homeownership through a partnership-based model with long-term wealth accumulation for themselves and their heirs rather than short-term home ownership through the conventional mortgage system, leading to negative equity and defaults when the housing market slumps. Originality/value Policymakers ought to rethink the mortgage design by promoting partnership-based finance to protect the equity a household accumulates over a lifetime and thereby enhancing stable and sustainable homeownership.

Foreclosures and Their Costs: Could They Have Been Avoided? The Case of California during the Mortgage Crisis

The author analyzes a loan-level dataset of 1,528 defaults in California that led to sale of the property as “Real Estate Owned” during the period 2005 to 2017. In 898 cases (59%), lenders lost 43% of the initial loan ($89,877) on average per foreclosure. In 942 cases (62%), borrowers lost 30% of the initial price of their home ($147,077) on average. The borrowers who ended up with a profit were those who increased their debt the most after the first purchase loan. Moreover, one in four borrowers generated an average profit of $115,856, while their lenders incurred an average loss of $93,114 precisely because excessive equity extraction transfered the downside risk to the lender. Two-thirds of all ARM borrowers defaulted within the first 3 years of the loan, implying underqualified borrowers at origination. This is an indication of predatory lending/borrowing practices that fueled the wave of foreclosures. The author finds that foreclosure discounts on REO sales in California were on average 35%, with the highest discount appearing in 2009. Measures that prevent or limit cash-outs during a housing boom, and incentives to default during a housing bust, could help reduce foreclosures and their costs. TOPICS:MBS and residential mortgage loans, legal and regulatory issues for structured finance, financial crises and financial market history Key Findings • An analysis of 1,528 foreclosures in California shows that lenders lost $89,877 and borrowers lost $147,027 on average per foreclosure during the 2008 mortgage crisis. One in four defaulting borrowers generated a profit while their lenders incurred a loss due to excessive equity extraction. • ARM borrowers defaulted within the first 3 years of the loan, indicating that these borrowers were underqualified at origination. FRM borrowers defaulted later but used cash-outs more aggressively, leading to negative equity that motivated defaults during the crisis. • Foreclosure discounts were on average 35% in California, with the worst discount occurring in 2009. Despite the volatility of HPI, every period of 12 years or longer since 1975, led to price appreciation, indicating that foreclosure should be avoided, as the recovery of the market always leads to capital gains.

How Much Does Home Equity Extraction Matter for Spending?

In this note, we investigate recent trends in home equity extraction and how these trends may have impacted household spending and residential improvements. Home equity extractions—which rose and fell with house prices in the 1990s and 2000s—have remained sluggish in the recovery despite low interest rates and gains in home equity. Compared to the mid-2000s, equity extractions have fallen especially among younger households and those with lower credit scores and higher leverage, suggesting that mortgage credit supply is likely tighter than before the recession, at least for portions of the population.

Housing Wealth or Collateral: How Home Value Shocks Drive Home Equity Extraction and Spending

Abstract We examine whether unanticipated changes in home values drive spending and mortgage-based equity extraction. To do this, we use longitudinal survey data with subjective information about current and expected future home values to calculate unanticipated home value changes. We link this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. We find that the marginal propensity to increase mortgage debt is 3%–5% of unanticipated home value gains. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. The effect is driven by young households with high loan-to-value ratios, which is consistent with the effect being driven by collateral constraints. Further, we find that the effect is driven by home owners who actively take out a new mortgage. The price effect is magnified among fixed rate mortgage (FRM) borrowers who have an incentive to refinance their loans to lock in a lower market rate. These results point to the importance of the mortgage market in transforming price increases into spending and suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.

Housing Wealth or Collateral: How Spending and Home Equity Extraction Respond to Unanticipated Housing Wealth Gains

We examine whether unanticipated changes in home values drive spending and mortgage-based equity extraction. To do this we use longitudinal survey data with subjective information about current and expected future home values to calculate unanticipated home value changes. We link this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. We find that the marginal propensity to increase mortgage debt is 3-5 percent of unanticipated home value gains. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. The effect is driven by young households with high loan-to-value ratios which is consistent with the effect being driven by collateral constraints. Further, we find that the effect is driven by home owners who actively take out a new mortgage. The price effect is magnified among FRM borrowers who have an incentive to refinance their loans to lock in a lower market rate. These results point to the importance of the mortgage market in transforming price increases into spending and suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.

How Do Households Respond to Job Loss? Lessons from Multiple High-Frequency Data Sets

How do households respond to job loss, and which self-insurance channels are most important? By linking high-frequency customer data from the largest bank in Denmark with government administrative registers, we quantify a broad range of responses to job loss in a unified empirical framework. Two responses stand out: during the first 24 months after job loss, reductions in household spending account for 30% of the income loss, while lower saving in liquid assets accounts for 50%. Other response margins highlighted in the literature - spousal labor supply, private transfers, home equity extraction, mortgage refinancing, and consumer credit - are less important.

How Quantitative Easing Works: Evidence on the Refinancing Channel

AbstractWe document the transmission of large-scale asset purchases by the Federal Reserve to the real economy using rich borrower-linked mortgage-market data and an identification strategy based on mortgage market segmentation. We find that central bank QE1 MBS purchases substantially increased refinancing activity, reduced interest payments for refinancing households, led to a boom in equity extraction, and increased aggregate consumption. Relative to QE-ineligible jumbo mortgages, QE-eligible conforming mortgage interest rates fell by an additional 40 bp and refinancing volumes increased by an additional 56% during QE1. We estimate that households refinancing during QE1 increased their durable consumption by 12%. Our results highlight that the transmission of unconventional monetary policy to the real economy depends crucially on the composition of assets purchased and the degree of segmentation in the market.

Natural expectations and home equity extraction

In this paper we propose a novel explanation for the increase in households’ leverage during the U.S. housing boom in the early 2000s. Specifically, we apply the theory of natural expectations, proposed by Fuster et al. (2010), to show that biased expectations on the two sides of the credit market have been a key determinant of the surge in households’ leverage but also that inaccurate long-run expectations on behalf of financial intermediaries are a necessary - yet so far overlooked - ingredient for matching the observed debt dynamics.

How Much Are Car Purchases Driven by Home Equity Withdrawal?

Previous research indicates that changes in housing wealth affect consumer spending on cars. We find that home equity extraction plays only a small role in this relationship. Consumers rarely use funds from equity extraction to purchase a car directly, even during the mid-2000s housing boom; this finding holds across three nationally representative household surveys. We find in credit bureau data that equity extraction does lead to a statistically significant increase in auto loan originations, consistent with equity extraction easing borrowing constraints in the auto loan market. This channel, though, accounts for only a tiny share of overall car purchases.

Housing Wealth Effects and Mortgage Borrowing. The Effect of Subjective Unanticipated Changes in Home Values on Home Equity. Extraction in Denmark

In this paper we examine whether changes in home values drive mortgage-based equity extraction. To do this we use longitudinal survey data with subjective information about current and expected future home values to calculate unanticipated home value changes. We link this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. We find that the marginal propensity to increase mortgage debt is 2-5 percent of unanticipated home value gains. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. The effect is driven by young households with high loan-to-value ratios which is consistent with the effect being driven by collateral constraints. Further, we find that the effect is driven by home owners who actively take out a new mortgage. The price effect is magnified among FRM borrowers who have an incentive to refinance their loans to lock in a lower market rate. These results point to the importance of the mortgage market in transforming price increases into spending and suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.

Has the Effect of Housing Wealth on Household Consumption Been Overestimated? New Evidences on Magnitude and Allocation

The effect of housing wealth on household consumption is puzzling as existing empirical results do not match with theoretical predictions. Existing theories – life cycle theory, permanent income hypothesis and user cost model – suggest that housing wealth impact should be small. However, most prior studies find that Marginal Propensity to Consume (MPC) out of housing wealth ranges between 0.04 to 0.09, indicating material impact of housing wealth on household consumption. Motivated by this discordance, this study uses the Panel Study of Income Dynamics to provide a step by step analysis to show how the housing wealth effect decreases as biases from unobserved variables are properly addressed. Once households’ unobserved preferences towards consumption and their future expected income are controlled for, our estimated MPC drops significantly. We also directly control for home equity extraction to disentangle the pure wealth effect channel and the collateral channel. Our findings show that a one percent increase in perceived housing wealth is associated with 0.01-0.02 percent increase in real, non-housing consumption after directly controlling for the collateral channel. Our estimated magnitude of housing wealth effect is much smaller than previous findings. Additionally, we find heterogeneity in MPCs across consumption categories – consumptions that are necessary in daily lives such as food and transportation do not respond to changes in perceived housing wealth while households increase their spending on clothes and recreation as housing wealth increases. We also employ an IV approach to disentangle permanent and transitory housing wealth shocks. Our results indicate that it is the deviation between perceived house price appreciation rate and the real house price appreciation rate in fundamental values that drives this small magnitude of MPC out of housing wealth in the short run (in cloth and recreation) and this housing wealth effect will move towards to zero in the long run as the perception converges with the fundamental values.

How Much Are Car Purchases Driven by Home Equity Withdrawal?

Previous research indicates that changes in housing wealth affect consumer spending on cars. We find that home equity extraction plays only a small role in this relationship. Consumers rarely use funds from equity extraction to purchase a car directly, even during the mid-2000s housing boom; this finding holds across three nationally representative household surveys. We find in credit bureau data that equity extraction does lead to a statistically significant increase in auto loan originations, consistent with equity extraction easing borrowing constraints in the auto loan market. This channel, though, accounts for only a tiny share of overall car purchases.