Negative Equity: House Price Declines or Equity Dilution? A Close Look at California Foreclosures During 2006-2008.

The usual view is that households who purchased at the top of the market are those most at risk of foreclosure due to price declines. Our paper shows that the presence of house price appreciation, coupled with liberal lending practices, also leads to higher risk of having negative equity, the primary driver of foreclosure. Using public record data to study Southern California borrowers actually experiencing foreclosure during 2006 - 2008, we show that 41% of them extracted equity. The borrowers who extracted lost their homes despite having, on average, 14% initial equity and 5% home value appreciation during their ownership period. In addition, low loan-to-value, price increase, young age and high income level increase propensity to extract. [ABSTRACT FROM AUTHOR]