Title

Financial Crisis and Credit Crunch in the Housing Market

Document Type

Article

Publication Date

8-2014

Publication Source

Journal of Real Estate Finance and Economics

Abstract

We investigate the recent financial crisis with an emphasis on the interlock among housing, mortgage, and credit markets. Following Geanakoplos (Econometric Society Monographs 2:170–205, 2003, 2010), we develop a model in which both prices of the mortgage and its collateral are simultaneously and endogenously determined. Our empirical tests confirm the model’s prediction that an adverse change in the risk free rate or the loan recovery rate can trigger the financial crisis as we observed. Finally, we discuss how the pro-cyclical leveraging practice by financial intermediaries can magnify their losses in mortgage-related assets and consequently cause significant contraction in the balance sheets of these firms.

Inclusive pages

256–276

ISBN/ISSN

0895-5638

Comments

Permission documentation is on file.

Publisher

Springer

Volume

49

Issue

2

Peer Reviewed

yes