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Abstract
Extracting home equity has become increasingly popular in the last decade, especially among subprime borrowers. Using the American Housing Survey, this paper examines the differences in the propensity to extract home equity across non-Hispanic black, Hispanic and non-Hispanic white homeowners in the United States. It focuses on two popular types of methods to extract home equity—cash-out refinance and home equity lines of credit. Controlling for housing and socio-economic characteristics, the study finds differences in the extensive margin in withdrawing equity, but not in the intensive margin. That is, while Non-Hispanic black homeowners are less likely to extract home equity in general than non-Hispanic whites there is no difference in the amount of equity withdrawn. However, much of this difference is driven by their lower propensity to withdraw equity using a home equity line of credit; non-Hispanic black and Hispanic homeowners are just as likely to withdraw equity using a cash-out refinance than non-Hispanic white homeowners.
Keywords:
Note
The author would like to thank Irene Fang and Irina Paley for helpful comments and suggestions. The views expressed in this research are those of the author and do not necessarily represent the policies or positions of the Office of the Comptroller of the Currency and any offices, agencies or instrumentalities of the United States Government.
Notes
3 See http://www.truth-out.org/how-ruthless-banks-gutted-black-middle-class-and-got-away-with-it62961
5 For the empirical work, the focus is on these two methods because it was the prevalent method of withdrawing home equity in the data used. In addition, households who use a home equity line of credit are defined as households who have a current balance on the account since households can open a home equity line of credit but not use it to withdraw equity.
6 The author thanks an anonymous referee for this suggestion.
7 Prior to 2001, the survey did not differentiate between home equity loans and lines of credit.
8 116 households who obtained a home equity loan are dropped because there was a very small proportion of households that used this method (0.7 per cent). Further, households who withdrew equity using a HELOC are defined as those that have a positive balance on their HELOC account. Results are similar if HELOC is defined as any household who has a HELOC account.
9 The results are similar if there is a look at whether households withdrew equity by 2007.
10 About 6 per cent of households were excluded because the homeowner had non-positive home equity.
11 Unless otherwise noted, withdrew equity is defined as households who actually borrowed against their home equity. That is, householders are not included who have a HELOC account but did not actually borrow.
12 Those that use a HELOC are defined as HELOC account holders that have a balance in the HELOC account. Results are similar if only those that have a HELOC account are considered.
13 The author thanks an anonymous referee for pointing out this potential explanation.
14 HELOCs generally charge higher interest rates and have more complex features such as non-usage fees, pre-payment penalties and an interest-only component.
15 Indeed, if property characteristics are excluded in the model specification (i.e. geographic indicators, house value, etc.), Hispanic borrowers are more likely to obtain a cash-out refinance loan than non-Hispanic white borrowers. This suggests that the propensity to obtain a cash-out refinance loan is driven by areas that experienced high house price appreciation rates, which were also areas of high Hispanic concentrations. The author thanks an anonymous referee for suggesting this explanation.
16 Results are robust to inclusion of education characteristics in the selection equation as well.
