Thank goodness rogues in the behavioral finance area have spent the last decade 
testing the long-held assumption maintained by economists that people are 
(always-generally-usually) rational.  Why might the home equity financing vehicle be 
under-utilized?  Let me throw out a suggestion:

People are often risk averse in situations where they should be risk loving.  The 
reverse also holds; namely, that people are risk loving in situations that call for 
risk aversion.  So, what does this mean for home equity financing?  Home equity loans 
for most Americans constitute a second lien on their primary residence.  The amount of 
this second lien is of course dependent upon the amount and terms of the first lien.  
Is it possible than homeowners, particularly after breathing excessive lawnmower fumes 
and being dulled by the monotony of Suburbia, might view the home equity line as 
having greater incremental risk than it really has?  Option-based theories of loan 
performance provide a framework for understanding the relationship between equity and 
loan performance on mortgage obligations.  Defaulting on a mortgage or home equity 
line is actually a put option, in which the borrower has the right (option) to 
transfer ownership of (put) the home to the lender (through foreclo!
sure or transfer in lieu of foreclosure) to retire the debts.  So you can see, if the 
market value of a home falls well below the value of the debts, you’d expect to see 
borrowers exercise this option.  There are of course transaction costs associated with 
exercising this option (namely, credit history and moving expense considerations).   

Perhaps homeowners overstate the transaction costs associated with exercising this 
option?  More likely, perhaps they overstate the risk associated with using up 
(through the home equity line) the buffer that exists between the amount of 
outstanding debt and the value of their home.  After all, the value of their home can 
be volatile.  In addition, home ownership is viewed as a right (mom, apple pie, and 
all that other stuff), societal obligation (access to the country club, putting down 
roots, etc), and pre-requisite to other things (children, pets, backyard croquet, 
etc.) in many parts of the country.  Perhaps placing the home in a position of greater 
perceived risk of foreclosure has elements of sacrilege associated with it.  I wonder. 
 Suffice it to say, I think the keys to this puzzle lie in the irrational, not the 

New York, NY

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