Second mortgages and household saving

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 1986Tax 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.

Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form

“…Forecasts based on Poterba (1989Poterba ( ) for 1987 a from Feldatein, Dicks-Mireaux and Poterba (1983).…”

“…Thus, it appears that there was significant substitution from 27 Of course, the individual must also hold enough home equity to secure the necary mortgage debt. Manchester and Poterba (1989) estimate that there was a potential stock of $2.5 trillion in unused mortgage borrowing in 1985, and that if the $100,000 limit on tax-deductible second mortgage debt had been in place only 10.5% of homeowners would have been constrained. 28 "Net" debt does not include debt used to finance portfolio investments, since interest on this debt is still deductible.…”

“…The cut in personal tax rates in 1986 should also have reduced t. Using municipal bond return data, Poterba (1989) implicitly estimates that the personal tax rate on the marginal investor in taxable bonds was 19% in 1987, and15.5% in 1988. In addition, individuals could no longer exclude the first $100 in dividend income, though for the most part this should not affect marginal incentives.…”

“…One possible approach to measure this weighted average of marginal tax rates is to compare the interest rates on taxable and tax-exempt bonds that otherwise have similar characteristics. Poterba (1989) compares the yield on long-term Treasury bonds to state and local municipal bonds and finds that the average t over 1981-1985is O.202. '°8 See Gordon (1982 for a formal derivation.…”

Saving for retirement by the self-employed

“…2 Throughout this paper, the terms self-employed, business owner, and proprietor are employed interchangeably. 3 See Manchester and Poterba (1989) and Kotlikoff (1990). Engen et al (1996) show that contributors have significantly more non-mortgage debt (other than business debt) than non-contributors.…”