You are here: Home / News Release Archives / 2014 / July / Doctoral Student, Faculty Member Collaborate to Investigate Effects of Subprime Lending

Doctoral Student, Faculty Member Collaborate to Investigate Effects of Subprime Lending

A recent article appearing in the Journal of Urban Economics authored by Penn State faculty member Brent Ambrose, Smeal Professor of Risk Management in the Smeal College of Business, and former Ph.D. student Moussa Diop examines the effects of subprime mortgage lending on the multifamily renting market. They found that subprime lending had a significant effect on rental defaults, which affected rental rates and property valuations.
July 2, 2014

A recent article appearing in the Journal of Urban Economics authored by Penn State faculty member Brent Ambrose, Smeal Professor of Risk Management in the Smeal College of Business, and former Ph.D. student Moussa Diop examines the effects of subprime mortgage lending on the multifamily renting market. They found that subprime lending had a significant effect on rental defaults, which affected rental rates and property valuations.

Diop, now an assistant professor of real estate and urban land economics at the Wisconsin School of Business, began his research with Ambrose in the second year of his Ph.D. studies.

“Brent always has a lot of great research ideas,” said Diop. “We all know that real estate markets are integrated, but when people were talking about the subprime mortgage crisis, they were only looking at housing, not at what was happening to the rental market. Nobody had told that story yet.”

“The willingness of ... faculty to work with Ph.D. students on research projects is a real plus. A lot of programs don’t really offer that."

In examining the role that subprime mortgage lending played in the global financial crisis in 2007 and 2008, Ambrose and Diop noted a gap in understanding the impact of mortgage credit expansion on the rental market.

“As we began our research, we did expect a negative effect on the rental market, which we found,” said Diop.

Because subprime lending allowed a larger segment of the population to enter the housing market, those remaining in the rental market were likely riskier and therefore more prone to default on their leases, all else the same.

“[A] one percent increase in subprime mortgage origination activity corresponds to an approximately 1.9 percent increase in the rental market lease default rate,” write the authors.

And that increased risk profile led to higher rental rates among lower income populations.

“Overall, our analysis demonstrates an interconnected real estate market such that an exogenous shock in one part of the market inevitably produces ripple effects on the other sectors."

“[T]o the extent that a larger portion of the lowest income segment of the population remains in the rental market, the expansion in mortgage credit may have had a disproportionately negative impact on this segment of the population least able to bear the consequences of the increased rental rates that resulted from the shift in the rental population risk profile,” the authors write.

They continue, “Overall, our analysis demonstrates an interconnected real estate market such that an exogenous shock in one part of the market inevitably produces ripple effects on the other sectors."

Diop says that the experience of working on and publishing a research project with Ambrose enhanced his Ph.D. Program experience by giving him the opportunity to increase his abilities as a research scholar.

“Coursework doesn’t really prepare you to do the level of research necessary for success in academia; you really have to get involved in research as early as possible,” said Diop. “The willingness of Brent and the other faculty to work with Ph.D. students on research projects is a real plus. A lot of programs don’t really offer that."

The paper “Spillover effects of subprime mortgage originations: The effects of single-family mortgage credit expansion on the multifamily rental market” appeared in the May 2014 issue of the Journal of Urban Economics. Author Brent Ambrose is the Smeal Professor of Risk Management in the Smeal College of Business and director of Ph.D. programs. Co-author Moussa Diop earned his Ph.D. at Smeal in 2013 and is currently an assistant professor of real estate and urban land economics at the Wisconsin School of Business.

About Ph.D. Programs at the Smeal College of Business
The Smeal College of Business Ph.D. program, aimed at students who want to pursue a career in academic research, offers specialization opportunities in accounting, finance, management and organization, marketing, real estate, and supply chain and information systems. Learn more at www.smeal.psu.edu/phd.

Recent News
Smeal Community Invited to Sign Honor Code 29 Aug

The Penn State Smeal College of Business community will have an opportunity to sign the Smeal honor code throughout the second week of classes. Signing sessions will take place on Sept. 2-4 from 10 a.m. to 2 p.m. in the Atrium of the Business Building on the University Park campus.

Smeal Student, Bitcoin Advocate Wins Trip to London Cryptocurrency Conference 27 Aug

Penn State Smeal College of Business student Patrick Cines will fly to London next month to attend the Inside Bitcoins: The Business of the Cryptocurrency World conference, thanks to a Twitter contest sponsored by CheapAir.com.

Students Learn Real-World Supply Chain and Sustainability Skills in Italy 26 Aug Students Learn Real-World Supply Chain and Sustainability Skills in Italy

This summer 23 Penn State Smeal College of Business students spent six weeks in Florence, Italy, studying supply chain and management from an Italian perspective with Norm Aggon, assistant department chair and instructor in operations and supply chain management, and Ron Johnson, senior instructor in management and organization.

Smeal Welcomes New Faculty Members 26 Aug

The Penn State Smeal College of Business welcomes more than 15 new members to its faculty this academic year.

MBA Students in U.S., Canada Invited to Register for Sustainability Case Competition 22 Aug

MBA students from AACSB-accredited programs in the U.S. and Canada are invited to register for the inaugural Penn State Smeal College of Business MBA Sustainability Case Competition. The competition, part of an initiative aimed at incorporating sustainability into the curriculum, will offer three top prizes that total $17,500.

More Recent News... More Recent News...