The Role of Home Equity Lending in the Recent Mortgage Crisis
California State University at Fullerton
California State Polytechnic University, Pomona
California State Polytechnic University, Pomona - Finance, Real Estate and Law Department
August 7, 2012
Real Estate Economics, Forthcoming
Home equity lending grew rapidly from 2000 to 2008 with balances more than tripling. In this paper, we examine the role this phenomenon may have played in increasing aggregate default risk during the mortgage crisis. We also document a relationship between growth in home equity lending and high house price depreciation and first mortgage default during the downturn of 2006 to 2009. Line of credit growth is shown to be associated with large increases in non-owner-occupied property purchase, suggesting that home equity lines of credit were tapped to fund such investments, exacerbating default rates during the market downturn.
Keywords: mortgage, default, housing, home equity lending
JEL Classification: G01, G21, R31
Date posted: August 8, 2012
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