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Introduction: Financial development has a direct impact on the housing market by facilitating access to credit. The increase in housing loans resulting from the relaxation of the credit constraint causes an increase in housing demand and house prices. Purpose: This study aims to examine the relationship between financial development and house prices in Turkey, using the variables: the domestic credit to the private sector and total housing and consumer credits. Methodology: To determine any long-run relationship between financial development and house prices, the autoregressive distributed lag methods are used, covering the selected variables such as real GDP, inflation, mortgage interest rate, and stock price from 2010Q1 to 2020Q2. Findings: The study’s findings show that both variables representing financial development have a statistically significant and substantial positive effect on house prices. Besides, the selected macroeconomic variables have the theoretically expected impact on house prices.

The 2007–2009 financial crisis initially appeared to have destroyed a huge amount of wealth in the United States. Housing prices dropped about 21% across the country and as much as 50% in some places, and the stock market dropped by nearly 50% as well. This chapter examines how the financial crisis differentially affected households at different parts of the income and wealth distributions. Our results show that all households lost about the same percentage of their wealth in that period. But because households in the top 10% of the wealth distribution owned many different kinds of assets, their wealth soon recovered. The bottom 80% of the wealth distribution had more of their wealth tied up in housing. We show that financial distress, indexed by foreclosures, being behind in mortgage payments, and changes in house prices were particularly concentrated in households in the bottom 80% of the wealth distribution. These households lost a large part of their wealth and have not yet recovered. Households that were most deeply affected were those who entered the housing market late and took out subprime loans. African American and Hispanic households were particularly susceptible as they bought houses late in the price bubble often with subprime loans.

Over the last decade, foreign currency indebtedness in Hungary has become a systemic financial problem, and its crippling impact on the real economy has been aggravated by its significant constraints on economic policy. In international comparative terms, however, there are certain specific features relating to Hungary which make this issue particularly problematic, and during the financial crisis both exchange rates and interest rates were important factors in increasing the burden on individual households. We present here a case study whereby our research focuses on the causes and determining factors of the pricing of Swiss franc-denominated mortgage loans. Our empirical exercise examines four potential price shocks which might have affected the pricing decisions of credit institutions: foreign currency interest rates, the country risk premiums (measured by Credit Default Swap (CDS) spread), the deteriorating quality of the loan portfolio and the taxes levied on banks. The questions which arise concern the relationship of these costs to the changes in interest rates and the extent to which these cost shocks were passed on by banks to their clients. Empirical evidence based on Vector Error Correction Model (VECM) shows a significant long-run relationship between cost factors and CHF denominated mortgage loans interest rates — with a reasonable sign and magnitude of parameters, but also with moderate forecasting power. Finding a tractable solution to the foreign currency debt trap is only possible if a fair distribution of burdens is achieved, and this should be supported by empirical facts. At the end of the day, all three affected parties (debtors, banks, and the Hungarian State) had made their contribution, but how fair and reasonable the distribution was remains an open issue for further research.

We use normal accident theory to analyze the financial sector, especially that part of the financial sector that processed home mortgages, and the mortgage meltdown. We maintain that the financial sector was highly complex and tightly coupled in the years leading up to the mortgage meltdown. And we argue that the meltdown exhibited characteristics of a system or normal accident; the result of a component failure (unusually high mortgage defaults) that, in the context of unique conditions (which included low interest rates and government policy encouraging home loans to less credit-worthy households), resulted in complex and tightly coupled interactions that financial elites and government officials were ill-equipped to control. We also consider the role that agency and wrongdoing played in the design of the financial system and the unfolding of the mortgage meltdown. We conclude that a fundamental restructuring of the financial system, so as to reduce complexity and coupling, is required to avert future similar financial debacles. But we also conclude that such a restructuring faces significant obstacles, given the interests of powerful actors and the difficulties of labeling those responsible for the meltdown as wrongdoers.

Portfolios of mortgage loans played an important role in the Great Recession and continue to compose a material part of bank assets. This chapter investigates how cross-sectional dependence in the underlying properties flows through to the loan returns, and thus, the risk of the portfolio. At one extreme, a portfolio of foreclosed mortgage loans becomes a portfolio of real estate whose returns exhibit substantial cross-sectional and spatial dependence. Near the other extreme, almost all loans perform and yield constant returns, which do not correlate with other performing loan returns. This suggests that loan performance effectively censors the random returns of the underlying properties. Following the statistical properties of the correlations among censored variables, the authors build off this foundation and show how the loan return correlations will rise as economic conditions deteriorate and the defaulting loans reveal the underlying housing correlations. In this chapter, the authors (1) adapt tools from spatial statistics to document substantial cross-sectional dependence across house price returns and examine the spatial structure of this dependence, (2) investigate the nonlinear nature of correlations among loan returns as a function of the default rate and the underlying house price correlations, and (3) conduct a simulation exercise using parameters from the empirical data to show the implications for holding a portfolio of mortgages.

This chapter analyses the causes and effects of the financial crisis that commenced in 2008, and it examines the dramatic government rescues and reforms. The outcomes of this, the most severe collapse to befall the United States and the global economy for three-quarters of a century, are still unfolding. Banks, homeowners and industries stood to benefit from government intervention, particularly the huge infusion of taxpayer funds, but their future is uncertain. Instead of extending vital credit, banks simply kept the capital to cover other firm needs (including bonuses for executives). Industry in the prevailing slack economy was not actively seeking investment opportunities and credit expansion. The property and job markets languished behind securities market recovery. It all has been disheartening and scary – rage against those in charge fuelled gloom and cynicism. Immense private debt was a precursor, but public debt is the legacy we must resolve in the future.

The 2000–2006 housing market bubble conformed to a classic boom–bust scenario that triggered the most serious and costly financial crisis since the Great Depression. The 2008 subprime mortgage collapse leveraged a financial system that privatizes profits and socializes risks. Several factors converge to set up the subprime mortgage market as an easy target for industry insiders to exploit. Enabling legislation expanded the potential pool of borrowers eligible for subprime mortgages and structured incentives to lenders willing to assume the risks. The securitization of subprime mortgages transformed bundles of high-risk loans into mortgage-backed securities that were in demand by domestic and foreign investors. Pressure to edge out competition produced high-risk loans marketed to unqualified borrowers. The final piece in the setup of the subprime lending crisis was a move from an origination model to a distributive model by many financial institutions in the business of lending. We find that the diffusion and totality of these business practices produced a criminogenic opportunity structure for industry insiders to profit at the expense of homebuyers and later investors.

Studies of Depression-era financial remediation have generally focused on federal deposit insurance and the provision of equity to banks by the Reconstruction Finance Corporation (RFC). This paper broadens the concept of financial remediation to include other programs – RFC lending, federal guarantees of farm and home mortgages, and the elimination of interest on demand deposits – and other intermediaries – savings and loans, mutual savings banks, and life insurance companies. The benefits of remediation or the amounts potentially at risk to the government in these programs are calculated annually and allocated to the various intermediaries. The slow remediation of real estate loans (two-thirds of these intermediaries' loans) needs further study with respect to the slow economic recovery. The paper compares Depression-era remediation with efforts during the 2008–2009 crisis. Today's remediation contrasts with the 1930s in its speed, magnitude relative to GDP or private sector nonfinancial debt, the share of remediation going to nonbanks, and emphasis on securities markets.

The current crisis in the mortgage securitization industry highlights significant failures in our models of how markets work and our political will, organizational capability, and ideological desire to intervene in markets. This article shows that one of the main sources of failure has been the lack of a coherent understanding of how these markets came into existence, how tactics and strategies of the principal firms in these markets have evolved over time, and how we ended up with the economic collapse of the main firms. It seeks to provide some insight into these processes by compiling both historical and quantitative data on the emergence and spread of these tactics across the largest investment banks and their principal competitors from the mortgage origination industry. It ends by offering some policy proscriptions based on the analysis.