Second Mortgages and Household Saving

Joyce M. Manchester, James M. Poterba

NBER Working Paper No. 2853 (Also Reprint No. r1331)
Issued in February 1989
NBER Program(s):   PE

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.

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Document Object Identifier (DOI): 10.3386/w2853

Published: Regional Science and Urban Economics, Vol. 19, No. 2, pp. 325-346, (1989). citation courtesy of

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