Minority mortgage market experiences leading up to and during the financial crisis
Stephen L. Ross 22 August 2014
The foreclosure crisis that followed the subprime crisis has had significant negative consequences for minority homeowners. This column reviews recent evidence in the racial and ethnic differences in high cost loans and in loan performance. Minority homeowners, especially black homebuyers, faced higher price of mortgage credit and had worse credit market outcomes during the crisis. This is largely due to the fact that minority borrowers are especially vulnerable to the economic downturn.
The foreclosure crisis and the growth of subprime lending that preceded the crisis have disproportionately affected low income and minority neighbourhoods (Geradi and Willen 2009, Fisher et al. 2010, Mayer and Pence 2007, Edminston 2009) and have had significant negative consequences for minority homeownership (Geradi and Willen 2009).
Global crisis Poverty and income inequality
subprime crisis, mortgage crisis, creditor discrimination, minority lending
The impact of asymmetric information about collateral values in mortgage lending
Johannes Stroebel 13 December 2012
Mortgage markets arguably spawned the post-Lehman crises – think subprime, Ireland, and Spain. This column argues that asymmetric information between competing lenders is an important feature in the financing of newly developed homes. Interestingly, lenders differ significantly in their information about true underlying housing collateral values. It is the identification of asymmetric information that allows policymakers to develop proposals that would improve how the market works and, with the right policies, how governments can limit the negative impact of asymmetry.
The mortgage market was the starting point for several of the post-Lehman crises: the subprime crisis, the Irish crisis, the Spanish crisis, and many more. It is a market typified by massive information asymmetries, and it has been argued that a market based on highly asymmetric information contributed to the buildup of bad mortgage debt during the first half of the last decade.
Global crisis Macroeconomic policy
subprime crisis, asymmetric information, global crisis
The Term Auction Facility effect on liquidity risk exposure
Stefano Puddu, Andreas Wälchli 12 December 2012
Did the Federal Reserve act as ‘lender of last resort’ during the worst of the crisis? This column contributes to the current debate on the appropriateness and effectiveness of non-standard measures that have been taken by the Fed. Quantitatively measuring the effect of the Term Auction Facility on participating banks’ liquidity risk, it seems that, because the Term Auction Facility programme provided banks with enough time to adjust exposures on their balance sheets, the Fed did act as ‘lender of last resort’.
As the interbank credit market was under serious stress at the end of 2007, the Federal Reserve launched the Term Auction Facility (TAF) with the aim of injecting liquidity into the interbank market. Cecchetti (2007) explains that banks were reluctant to lend to other banks, mainly because of uncertainty about the asset quality on the balance sheets of the potential borrowers. Between December 2007 and March 2010, the Fed auctioned a total of $3.81 trillion collateralised funds, with maturities of 28 or 84 days.
subprime crisis, liquidity risk, global crisis, term auction facility
Reflections on the curious contrast of public policies between Germany and the US: Real estate versus human capital
Joshua Aizenman, Ilan Noy 25 August 2012
In the years leading up to the global crisis, the US focused on subsidising home ownership, whereas Germany placed much more emphasis on education and vocational training. While it is easy to think that this explains the subsequent performance of the two economies, this column provides some much needed economic analysis.
During the years leading to the global crisis, the US and Germany were the dominant growth poles in the Americas and Europe, respectively (ADD CITE). Their position reflected their growth performance and their dominant size. Both countries were characterised by contrasting patterns of public policies towards home ownership and education – the US put greater public commitment to subsiding home ownership, whereas Germany put much greater public commitment towards education and vocational training.
Education Global crisis Macroeconomic policy
Germany, education, US, housing, subprime crisis, global crisis
Global crises and equity market contagion
Geert Bekaert, Michael Ehrmann, Marcel Fratzscher, Arnaud Mehl 12 August 2011
As financial markets take another turn, this column explores lessons from the global crisis of 2007-2009 and discusses the source and determinants of contagion. It argues that real and financial linkages to the US or the global economy played a relatively minor role. Instead the crisis was a “wake-up call” to investors to pay more attention to countries’ policies and fundamentals.
The collapse of global equity markets between August 2007 and March 2009 has been part of the most severe global crisis since the Great Depression. While the crisis initially had its origin in the US in a relatively small market segment, the subprime mortgage market, it rapidly spread across virtually all economies, with many countries experiencing even sharper equity market crashes than the US. This makes this episode an ideal laboratory to revisit the debate about the presence and sources of contagion in global equity markets.
Financial markets Global crisis
subprime crisis, financial crises, global crisis, Eurozone crisis
Three's company: Wall Street, Capitol Hill, and K Street
Deniz Igan, Prachi Mishra 11 August 2011
Did anti-regulation lobbying fuel the subprime crisis? This column shows that there is a strong relationship between financial industry lobbying and favourable financial regulation legislation. It argues that the financial industry fought, and defeated, measures that might have curbed some of the reckless lending practices that many think played a pivotal role in igniting the crisis.
At the end of 2007—as markets grappled with early stages of what would become the worst financial crisis in the post-WWII era and a severe recession seized the US economy—the Wall Street Journal reported that two of the largest mortgage lenders in the US spent millions of dollars in political donations, campaign contributions, and lobbying activities from 2002 through 2006 (Simpson 2007).
Global crisis Politics and economics
US, Corruption, subprime crisis, financial regulation, lobbying, global crisis
Foreclosures, house prices, and the real economy
Atif Mian, Francesco Trebbi, Amir Sufi 10 February 2011
Several academics, policymakers, and regulators emphasise the role of foreclosures in the Great Recession and subsequent global crisis. This column provides one of the first attempts to show this empirically. Using micro-level data from all US states, it shows that foreclosures had a significant negative effect on house prices, residential investment, durable consumption – and consequently the real economy.
How does a negative shock to the economy get amplified into a severe and long-lasting economic slump? The answer may be found in your house. An extensive body of theoretical research shows that the forced sale of durable goods – in many cases a house – can have two undesirable consequences. First, the price of these goods is driven down. Second, these negative price effects can lead to a significant decline in real economic activity (see for example Shleifer and Vishny 1992, Kiyotaki and Moore 1997, Krishnamurthy 2009, Lorenzoni 2008, and Shleifer and Vishny 2010 for a recent discussion).
Global crisis Macroeconomic policy
US, house prices, subprime crisis, global crisis, foreclosures
Vox’s annual break and some holiday reading tips
Richard Baldwin 25 December 2010
Vox takes its annual break between 25 December 2010 and 2 January 2011. This column documents the coevolution of VoxEU and the global economic crisis since June 2007. It also highlights a few columns that readers should read (or re-read) in preparation for the Eurozone’s next crisis.
After months of preparatory work, Vox was launched in June 2007. The first weeks were going well – and then the subprime crisis struck.
The subprime crisis establishes Vox’s niche
On the 9th, 10th, and 13th of August 2007, the US Fed injected a total of $38 billion into the US banking system; simultaneously, the ECB injected ten times that much into Europe’s banking system.
This action – which made headlines around the world – seemed inexplicable.
Frontiers of economic research
ECB, subprime crisis, global crisis, Eurozone crisis
Crisis “shock factors” and the cross-section of global equity returns
Charles W Calomiris, Inessa Love, Maria Soledad Martinez Peria 11 December 2010
Autumn 2008 was calamitous for global equities. This column presents data on stock returns from over 17,000 firms in 44 countries suggesting that the decline in share prices was associated with three separate and identifiable “shock factors”: the fall in global demand, the contraction of credit supply, and the selling pressure on equity as investors were forced to unload some of their holdings.
The financial crisis of 2007-2008 was a significant shock to the financial system and the global economy. The shock that originated in the mortgage market and banking system reduced the supply of credit, led to distressed sales of risky assets as banks and investors scrambled to shore up their liquidity and capital ratios, and plunged the global economy into a severe recession, one in which economic activity either slowed or contracted (IMF 2009), and global trade collapsed (Baldwin 2009).
Global crisis International finance
subprime crisis, global crisis, Stock returns