Research

Publications

How "Bad" is Renter Protection for Institutional Investment in Multifamily Housing? with Stanimira Milcheva

Journal of Housing Economics, 2023

We assess the role of state-level renter protection regulations on the pricing, performance and risk of multifamily housing. We construct a renter protection score (RPS) to measure the extent of renter protection in each state. Using a proprietary property-level dataset from loans backed by commercial mortgage backed securities (CMBS) and census tract socioeconomic variables, we study the role of RPS on initial capitalization (cap) rates, annual net operating income (NOI) and annual loan delinquency rates of multifamily housing.

We find that, contrary to conventional wisdom that renter protection is `bad' for investors, multifamily housing in high RPS states is associated higher annual NOI and NOI growth and lower delinquency rates. We also show that better tenant protection is associated with lower initial cap rates. The results point to investors perceiving properties in more regulated states as lower risk due to reduced income volatility. For institutional investors, higher levels of renter protection are, therefore, not `bad' but are instead associated with lower cash flow volatility and better income growth prospects.

Cleaning Up Corruption and the Climate: The Role of Green Building Certifications with Avis Devine and Svetlana Orlova

Finance Research Letters, 2022

Adoption of green building certifications can help mitigate climate change in several ways. The most evident impact is introduction and implementation of higher environmental standards designed to reduce greenhouse gas emissions. We document a less obvious effect of green building certifications on corruption: an increase in certification adoption is associated with a decrease in corruption at the country level. This suggests that improvements in country-level control of corruption, particularly in the construction industry, may also be correlated with more efficient use of existing resources and attract climate-conscious investments, thus helping to reduce the gap in financing necessary to achieve carbon neutrality goals.

Mortgage Relief: Who CARES? with Mariya Letdin 

Journal of Housing Research, 2022

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides mortgage forbearance relief to qualifying borrowers, whose loans are placed in a government backed mortgage pool. We analyze the effects of being ineligible for the program by examining the aftermath of the same requirement in the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with Freddie Mac loans and privately securitized loans we compare loan performance and quantify potential wealth, consumption, and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for a government relief program. We show that restricting modification benefits to include only borrowers in federally backed mortgage pools results in significant loss in wealth (through reduced prepayment and increased default) for those otherwise similar borrowers whose loans are placed outside of GSE pools. The greatest detriment is documented in CBSAs with the largest housing price declines. 

Advancing Energy Efficiency through Green Bond Policy: Multifamily Green Mortgage Backed Securities Issuance with Avis Devine

Journal of Cleaner Production, 2022

Diffusion of new technology, such as green bond policies, is impacted by inefficiencies and frictions as the market navigates adoption. Using data from Fannie Mae multifamily green mortgage backed security issuances, we identify possible disconnects between pricing and benefits, as well as adoption trends. Evidence indicates that loans on properties backed by green bonds that incentivize energy efficiency in multifamily buildings receive lower interest rates, lower debt service coverage ratios, and higher leverage ratios than their ``brown" counterparts. Some of these findings represent stated program benefits, yet others do not. Additionally, some benefits are observed accruing to properties which are not participating in a green MBS program, despite already qualifying for participation. Supporting evidence points to drivers of adoption and program refinements which could aid in policy maximization. Our results carry implications for both existing green bond programs as well as the diffusion of green bond policy into the broader capital markets.

Boom Town Business Dynamics with Ryan Decker and Greg Upton

Semi-finalist Best Paper, FMA 2019

FED Discussion Series Paper 2020-081

Journal of Human Resources, forthcoming

http://jhr.uwpress.org/content/early/2022/01/05/jhr.0221-11501R1.abstract 

The shale oil and gas boom in the U.S. provides a unique opportunity to study economic growth in a "boom town" environment, to derive insights about economic expansions more generally, and to obtain clean identification of the causal effects of economic growth on specific margins of business adjustment. The creation of new business establishments--separate from the expansion of existing establishments--accounts for a disproportionate share of the multi-industry employment growth sparked by the shale boom, an intuitive but not inevitable empirical result that is broadly consistent with canonical models of firm dynamics. New firms, in particular, contribute nearly half of the cumulative economic growth resulting from the shale boom. 

Home Maintenance Expenditures and Social Interaction with Yuree Lim

Real Estate Finance, 2020

Investment in home maintenance is important for homeowners because it helps preserve the value of their housing asset, a large component of household wealth. However, as households age, they invest less in home maintenance and today's retirement age households are less likely to own their homes outright that previous generations. However, we find that increased social interaction is associated with higher levels of home maintenance expenditures. This effect is concentrated in retirement age homeowners and is robust to controls for household income, wealth, and housing value. These results have implications not only for the financial well-being of aging households and their heirs, but also for local municipalities, neighboring properties, and mortgagees who are also affected by the home maintenance investment decisions of homeowners. 

Understanding Social System Drivers of Green Building Innovation Adoption in Emerging Market Countries: The Role of Foreign Direct Investment with Avis Devine

Cities, 2019

https://doi.org/10.1016/j.cities.2019.03.005 

There has been a growing academic focus on the economic, environmental, and social implications of sustainable innovation adoption. This work has largely focused on the developed world, yet the majority of people and future economic growth lies in the developing world. Further, most research examines micro data on consumers or firms, limiting what is known regarding the role of macro factors on diffusion, such as social systems. Addressing these limitations, this research provides the first high-level insights into how green building adoption is occurring in developing countries. Utilizing a hand-collected dataset of all green building certification activity in 97 emerging market countries over fifteen years, we examine the relationship between economic development and green building adoption. We find use of international certification programs is far more common than domestic programs, and that domestic programs have only been originated in advanced emerging economies. Additionally, we see a relationship between foreign direct investment into emerging markets countries and the proliferation of green building, and that in most cases, domestic certification programs only originate after international certification activity has been introduced to the local economy. Our findings carry economic and policy implications, worthy of consideration by both foreign investors and emerging market countries.

Mortgage Default Decisions in the Presence of Non-normal, Spatially Dependent Disturbances  with Raffaella Calabrese and Kelley Pace

Regional Science and Urban Economics, 2019

https://doi.org/10.1016/j.regsciurbeco.2019.01.001

We develop a flexible binary choice model for mortgage default decisions that incorporates neighborhood effects in the disturbances. The main advantage of the model lies in its performance in providing accurate estimates of the probability of default for risky mortgage loans. In addition, it can be applied to portfolios with a high number of loans. Assuming mortgage decisions with spatially dependent disturbances, the proposed approach uses the generalized extreme value distribution to flexibly model the error terms. To estimate the model on a large sample size, we use a variant of the Geweke-Hajivassiliou-Keane algorithm. We apply the proposed model and its competitors to a large data set on almost 300,000 mortgages in Clark County, which includes Las Vegas, over 2009-2010. The results show that our proposal greatly improves the predictive accuracy of identifying loans that will default. Moreover, the competitor models underestimate credit Value at Risk.

Local Labor Market Shocks and Residential Mortgage Payments: Evidence from the Shale Oil and Gas Boom with Greg Upton

Resource and Energy Economics, 2018.

https://doi.org/10.1016/j.reseneeco.2018.05.001 

USAEE Working Paper, 16-258

Frequently, housing is the largest item on a household's balance sheet, and therefore making monthly mortgage payments is often both the largest regular expenditure as well as a primary savings vehicle for households. However, changes to economic conditions impact household spending and savings decisions. To investigate the dynamics of this relationship, we examine mortgage payment choices of homeowners who purchased property in areas that later experienced a positive shock to local economic conditions via the shale oil and gas boom. We find that borrowers with properties located in areas with shale oil and gas booms experienced a 6% reduction in the probability of missing a mortgage payment over the period 2007--2014. Indexing these results to the size of the boom, we find that one hundred additional rigs (billion dollars of oil and gas produced) is associated with a 3.2% (1.6%) decrease in default. Additionally, we find differential effects on housing markets across geography, time, loan leverage, and credit risk categories.  

Asymmetric Effects of Housing Wealth on College Enrollment with Greg Upton

Applied Economics Letters, 2018.

http://dx.doi.org/10.1080/13504851.2017.1310989 

We investigate the impact of housing wealth, credit availability and financial distress on college enrollment decisions. We find that housing wealth is negatively related to enrollment in public schools and positively related to enrollment in private schools. This evidence suggests that, on average, students substituted away from private schools towards public institutions during the recent financial crisis.

Deleveraging and Mortgage Curtailment with Hong Lee and Kelley Pace

Journal of Banking and Finance, 2015.

http://dx.doi.org/10.1016/j.jbankfin.2015.06.019

Using monthly loan-level data, individual curtailment payments from January 2001 to June 2011 are observed for mortgages in twenty metropolitan statistical areas. Contrary to some earlier assertions, American homeowners now frequently commit funds towards their mortgage payments in excess of the amount due; over 30% of loans outstanding as of June 2011 have made at least one curtailment payment. After controlling for borrower and loan-level variables, we show that the latent propensity to curtail has steadily risen from 2003 to 2006 and remains at elevated levels. Therefore, curtailment provides an example of consumer deleveraging behavior that began prior to the Great Recession.

Selected Working Papers

A Revealed Preference Approach to Identifying Strategic Mortgage Default with Rajesh P. Narayanan and Kelley Pace

Revisions Requested

 Borrowers who curtail (partially prepay) their mortgage principal reveal diminished motives to strategically default relative to borrowers who do not curtail. We exploit defaults by such curtailers to examine the extent to which default is strategically motivated. Specifically, we estimate a baseline sensitivity of default to leverage for curtailers and contrast it with the sensitivity displayed by non-curtailers. Our results show that between 2008 and 2012, a 10% increase in leverage increased the probability of  strategic default by approximately 50%. We demonstrate that our findings are robust to unobservable borrower liquidity.

Income Stability and Mortgage Default with Kelley Pace

Under Review

Debate exists on the relative importance of employment status and house price declines in accounting for the large number of mortgage defaults during the Great Recession. To avoid the complexities posed by potential interactions among house prices, employment status, and income, we propose the natural experiment of examining the default decisions of homeowners with job security and income stability. Specifically, we observe governmental workers employed in Clark County Nevada in FY2009-2010, during the Great Recession, and compare the sensitivity of their default decisions to changes in house values to the general population. Relative to the overall population, those homeowners with known income stability exhibit a somewhat lower rate of default than the general public, but both groups are equally sensitive to price in their default decisions.