Leveraging the American Dream: Explaining the Shift Towards Mortgage Debt since the 1970’s

Abstract

We show that the determinants of mortgage borrowing and other forms of consumer credit differ: borrowers tend to consider asset holdings when taking out a mortgage, but focus on short-term economic expectations when borrowing other consumer credit. We hypothesize that this “mortgage wealth effect” occurs in part due to a borrower’s ability to collateralize real estate assets, and a growing perception of the house as an investment as well as a residence. Further, we propose that this wealth effect contributed to an increase in mortgage debt from the 1970s forward, and that legislative changes and the growth of securitization in the 1990s magnified this effect.