House Price Declines or Equity Extraction?  A Close Look at California Foreclosures during 2006-2008

Cynthia Holmes - Ted Rogers School of Management, Ryerson University

Abstract
This paper examines a set of California borrowers who experienced foreclosure in 2006, 2007, or 2008.  We measure house price movements over their entire ownership period and concurrent borrowing activities.  About half of the borrowers extracted equity through refinancing or junior lien borrowing, with total cash out of approximately $105,000 per property, substantially exceeding the average decline in property value of $40,000 over their ownership period.  Our empirical analysis also investigates the timing of equity extraction and house prices patterns.  Results suggest a different narrative from the usual account of the foreclosure crisis and have implications for better modeling of mortgage default risk.

Key words: mortgage, default, foreclosure

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