This paper examines the role of home equity-based borrowing in the U.S. household leverage crisis leading up to the 2007-2008 financial crisis. Using individual-level data on homeowner debt and defaults from 1997 to 2008, the authors find that borrowing against increased home equity was responsible for a significant portion of the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. They estimate that the average homeowner borrows 25 to 30 cents for every dollar increase in home equity. The borrowed funds are not used to purchase new real estate or pay down credit card balances, suggesting that they may be used for consumption or home improvement. The authors also find that home equity-based borrowing is more common among younger households, those with low credit scores, and those with high initial credit card utilization rates. While homeowners in high house price appreciation areas experienced a relative decline in default rates from 2002 to 2006, they saw very high default rates from 2006 to 2008. The authors estimate that home equity-based borrowing accounted for 2.8% of GDP annually from 2002 to 2006 and at least 34% of new defaults from 2006 to 2008. The findings highlight the importance of understanding how homeowners respond to fluctuations in asset prices and the potential macroeconomic consequences of home equity-based borrowing.This paper examines the role of home equity-based borrowing in the U.S. household leverage crisis leading up to the 2007-2008 financial crisis. Using individual-level data on homeowner debt and defaults from 1997 to 2008, the authors find that borrowing against increased home equity was responsible for a significant portion of the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. They estimate that the average homeowner borrows 25 to 30 cents for every dollar increase in home equity. The borrowed funds are not used to purchase new real estate or pay down credit card balances, suggesting that they may be used for consumption or home improvement. The authors also find that home equity-based borrowing is more common among younger households, those with low credit scores, and those with high initial credit card utilization rates. While homeowners in high house price appreciation areas experienced a relative decline in default rates from 2002 to 2006, they saw very high default rates from 2006 to 2008. The authors estimate that home equity-based borrowing accounted for 2.8% of GDP annually from 2002 to 2006 and at least 34% of new defaults from 2006 to 2008. The findings highlight the importance of understanding how homeowners respond to fluctuations in asset prices and the potential macroeconomic consequences of home equity-based borrowing.