The Global Financial Crisis and Housing

The Global Financial Crisis and Housing

A New Policy Paradigm

KDI series in Economic Policy and Development

Edited by Susan Wachter, Man Cho and Moon Joong Tcha

This innovative book analyses the role played by real estate markets in global financial stability and examines the fragile link between the two. Through what transmission channels do housing market cycles influence broader economic systems? How has the Global Financial Crisis shifted our view and understanding of these linkages? This detailed book answers these questions in an international comparative perspective. Specific topics covered include macroeconomic transmission channels of the housing cycle, the role of housing in the finance system, construction financing as a cycle amplifier, and various related public policy issues such as the policy remedies needed to deal with housing and mortgage-driven crises.

Chapter 10: Mortgage defaults and risk-based capital: post-global financial crisis development and implications for emerging markets

Tyler T. Yang and Jessie Y. Zhang

Subjects: economics and finance, asian economics, financial economics and regulation, international economics


The housing finance institutions have a significant impact on the growth of the housing market. Various capital requirements are established by the U.S. government to ensure the financial safety and soundness of these institutions. However, the recent subprime crisis reminded us that even the seemingly most sophisticated housing finance system in the world can suddenly collapse. Since then, governments and think tanks around the world have devoted substantial effort to exploring the cause of the collapse. Many new policies and regulations with regard to capital requirements are introduced and implemented by the U.S. government in order to mitigate possible future impact of the Global Financial Crisis (GFC) to the overall economy to date. Among all the regulatory principles, some new regulation trends arise: Risk retention The Dodd-Frank report of 2010 mandates a risk-retention requirement of 5% capital reserve for all newly originated loans, except for the safest Qualified Residential Mortgages (QRM). This and similar regulations are intended to increase the responsibility of mortgage underwriters and encourage sound quality control behaviors. Counter-cyclical policies toward more stable housing and housing finance markets Previous static capital regulations tend to induce pro-cyclical market consequences. That is, banks have excess capital when the economy is good.

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