Nexus between the delinquency rate on mortgage and financial depth: Evidence from the United States

The aim of this paper is to shed light on the link between financial depth (75 % of private sector credits, 10% of saving deposits and 10% of total checkable deposits and 5% of mutual funds as a share of real gross domestic product (GDP) and the delinquency rate on mortgages in the United States. As is well known, the Great Recession (Moderation) of 2007-2009 in the U.S. economy has caused unprecedented damage to the mortgage market having its roots in the creation of the sub-prime mortgages and the financial derivatives which presumably have reached levels more than five times the total world GDP in 2008. Given, this special episode of turmoil and fluctuation, many studies have argued that the culprit is the mortgage market. Little blame is put on financial derivatives as they could not have been created without the sub-prime mortgages that were provided to many people who probably had almost no chance of owning a house in their lifetime. After a literature review, this study develops an auto regressive distributed lag (ARDL) model with quarterly data to assess the factors that caused the default of so many mortgages in such a short period of time which led to the second worst economic crisis in terms of the macroeconomic structure. There is statistically significant evidence that borrower default on mortgages reacts positively to financial depth with a time lag. Furthermore, the unemployment rate is the main cause of default, consistent with the literature on this topic, as it dampens the ability of households to settle their debts. Other macroeconomic variables such as mortgage rates and Institute for Supply Management (ISM) values appear to have little impact on the delinquency rate on a mortgage in the USA.