Equity extraction and mortgage default

Using a property-level data set of houses in Los Angeles County, I estimate that about 15% of the recent surge in mortgage defaults is attributable to early cohorts of homebuyers who would not have defaulted had they not borrowed against the rising value of their homes during the boom. I develop and estimate a structural model capable of explaining the patterns of both equity extraction and default observed among this group of homeowners. In the model, households who have taken out equity have both higher loan-to-value ratios and increased mortgage payments relative to their income, a combination that makes them more likely to default. Using this model to analyze a policy that limits the maximum size of cash-out refinances to 80% of the current house value, I find that this restriction would reduce defaults by 18%, partially by inducing households to purchase less expensive homes.