Tax Policy

Home equity financing, estimated to represent about 12 percent of all housing debt, or $357 billion in 1991, grew at an average annual rate of about 20 percent between 1981 and 1991. This report reviews the use of home equity financing, including both home equity loans and home equity lines of credit, and how the Tax Reform Act of 1986 affected household use of home equity financing compared with other forms of consumer credit. GAO discusses (1) what trends exist in home equity as well as mortgage-backed financing and other kinds of consumer credit used during the 1980s; (2) who is using home equity financing and for what purposes; (3) what factors caused the growth in home equity financing; (4) what problems are associated with this type of borrowing; and (5) what the implications of various tax policy options are that might be instituted 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.