Working Paper: NBER ID: w2853
Authors: Joyce M. Manchester; James M. Poterba
Abstract: Second mortgages accounted for 10.8% of the stock of outstanding mortgage debt at the end of 1987, up from 3.6% at the beginning of the 198Os. This paper investigates the determinants of second mortgage borrowing and the characteristics of second mortgage borrowers. We first calculate the outstanding stock of home equity that remains to be borrowed against on tax-preferred terms, recognizing the limits on interest deductions in the 1986 Tax Reform Act and the 1987 Omnibus Budget Reconciliation Act. Despite these limits, we estimate that more than two trillion dollars of housing equity remains to be borrowed against by current homeowners. We then present cross-sectional evidence suggesting that households who obtain second mortgages after purchasing a home ace less wealthy than other households with similar characteristics. Each dollar of second mortgage borrowing is associated with a seventy-five cent reduction in household net worth. While these results cannot be given a causal interpretation, they are consistent with the view that increased access to second mortgages has reduced personal saving.
Keywords: Second Mortgages; Household Saving; Home Equity; Financial Behavior
JEL Codes: D14; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| second mortgage borrowing (G51) | net worth (G19) |
| second mortgage borrowing (G51) | household wealth accumulation (D14) |
| second mortgage borrowing (G51) | financial assets (G19) |
| second mortgage borrowing (G51) | noncorporate business equity (G30) |