Financial Literacy and Mortgage Equity Withdrawals

The recent U.S. consumption boom has been linked to mortgage equity withdrawals (MEW s). MEW s are correlated with covariates consistent with a permanent income framework augmented for credit-constraints. Nevertheless, many households are financially illiterate. We assess the unexplored linkages between MEWs and different measures of financial literacy using panel data from the Health and Retirement Study (HRS). Findings indicate that declines in mortgage interest rates encouraged MEWs. Nevertheless, financially illiterate households were significantly more likely to withdraw housing equity. Also significant were state differences in debtor versus creditor interests in bankruptcy, with loan demand effects outweighing loan supply effects across states.

financial crisis/consumption/credit constraints/financial frictions

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