Spillover Effects of Subprime Mortgage Originations: The Effects of Single-Family Mortgage Credit Expansion on the Multifamily Rental Market

Abstract

The dramatic expansion in subprime mortgage credit fueled a remarkable boom and bust in the US housing market and created a global financial crisis. Even though considerable research examines the housing and mortgage markets during the previous decade, how the expansion in mortgage credit affected the rental market remains unclear; and yet, over 30 percent of all U.S. households reside in the rental market. Our study fills this gap by showing how the multifamily rental market was adversely affected by the development of subprime lending in the single-family market before the advent of the 2007/2008 subprime induced financial crisis. We provide evidence for a fundamentals based linkage by which the effect of an innovation in one market (i.e, the growth in subprime mortgage originations) is propagated through to another market. Using a large database of residential rental lease payment records, our results confirm that the expansion in subprime lending corresponds with an overall decline in the quality of rental payments. Finally, we present evidence showing that the financial performance of multifamily rental properties reflected the increase in rental lease defaults.