Three years after the global financial crisis started academic and popular publications assessing its origins, consequences and wider implications are starting to emerge. The origins of the crisis are generally explained as stemming from the rapid increase in subprime mortgage lending in the United States and the credit default swaps banks and other financial institutions traded amongst themselves based on these loans. As homeowners found it increasingly difficult to make their repayments and housing prices in the United States started to drop, a downward spiral ensued. In this cycle ever-growing numbers of homeowners defaulted on their mortgages, unable to meet interest payments or to re-mortgage, and banks foreclosed on the houses even as their own assets and investments were exposed to the losses stemming from defaulted mortgages. With the foreclosures devaluing house prices further and the exposure of banks making them less willing and able to refinance mortgages, the situation quickly spiraled downwards. The complex global trade in credit default swaps and other derivatives meant that the problems were amplified and spread beyond the United States until ultimately many national governments decided to intervene with financial assistance mainly aimed at the financial institutions.
House prices and credit risk: Evidence from the United States
