Tax Policy:

Many Factors Contributed to the Growth in Home Equity Financing in the 1980s

GGD-93-63: Published: Mar 25, 1993. Publicly Released: Apr 28, 1993.

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Pursuant to a congressional request, GAO reviewed the use of home equity financing, focusing on: (1) trends in home equity and mortgage-backed financing, and other types of consumer credit between 1981 and 1991; (2) causes of the growth in home equity financing; (3) problems caused by home equity financing; and (4) the implications of tax policy options to constrain home equity borrowing.

GAO found that: (1) between 1981 and 1991, home equity financing grew 21 percent, representing an estimated 12 percent of all housing debt; (2) by 1991, home equity loans and lines of credit increased at an average annual rate of 6.6 percent; (3) the proportion of home equity debt to total consumer debt increased by more than 200 percent between 1981 and 1991; (4) factors that contributed to the growth in home equity debt included rising home values, changes in banking laws, and aggressive marketing campaigns; (5) the elimination of tax deductions for interest expenses for many forms of consumer debt contributed to the growth of home equity financing; (6) characteristics of borrowers using home equity loans and lines of credit varied little, except for income levels; (7) households in the northeastern region of the country were more likely to have home equity financing than other regions; (8) the primary use of home equity financing was for home improvements; (9) the delinquency rates for home equity loans are similar to those for other types of consumer debt and the rates for home equity lines of credit were the lowest for all types of debt; and (10) limiting the amount of deductible home equity financing would be difficult for the Internal Revenue Service to enforce under current information reporting requirements.

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