Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border
American Economic Journal: Economic Policy, Forthcoming
66 Pages Posted: 1 Jul 2014 Last revised: 22 Mar 2017
Date Written: January 31, 2017
Texas is the only US state that limits home equity borrowing to 80 percent of home value. This paper exploits this policy discontinuity around 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 1.5 percentage points for all mortgages and 4-5 percentage points for nonprime mortgages. Estimated nonprime mortgage default hazards within 25 to 100 miles on either side of the Texas border are about 20 percent smaller when crossing into Texas.
Keywords: Home Equity, Mortgage Default, Negative Equity
JEL Classification: G21, G28, R28
Suggested Citation: Suggested Citation