The Price of Subprime Mortgages at Mortgage Brokers and Lender
Posted: 1 Dec 2010
Date Written: November 29, 2010
This paper examines pricing of subprime first mortgages by brokers and lenders using data on loans in originated between the first quarter of 1998 to the first quarter of 2006 at seven large subprime mortgage lenders. The results provide little evidence that most consumers obtaining mortgages through brokers pay higher prices than consumers obtaining mortgages directly from lenders. We first estimate a model explaining price using data on the loans originated directly by lenders (lender model). We predict annual percentage rates for broker-originated loans using the lender model and compare actual annual percentage rates for the broker-originated loans with the predicted rates. For five of six mortgage products, half or more of customers obtaining first mortgages through brokers paid less than we estimate they would have paid if they obtained the loan directly from the lender. For the sixth product, which accounted for a small percentage of all broker originations, 45.5 percent of loans had an annual percentage rate that was less that predicted by the lender model. This finding does not support the hypothesis that brokers generally steer customers into more costly than those they could obtain from lenders. We then repeat the process by estimating a model explaining price as a function of loan terms and borrower characteristics using the data on loans originated through brokers (broker model). Using this model to predict annual percentage rates on loans originated directly with lenders, we compare the actual annual percentage rate with the predicted annual percentage from the broker model. If brokers steer borrowers to higher priced products, we would expect actual rates for lender originations to be less than predicted rates from the broker model. Four of six products accounting for 85.4 percent of lenders mortgage originations, had annual percentage rates that were greater than the rates predicted by the broker model. Large percentages of originations for the other two products has actual rates that were larger that the annual percentage rates predicted by the broker model. Overall, most customers obtaining loans directly from the lender paid more than they would have paid had they obtained the loan through a broker.
JEL Classification: E6
Suggested Citation: Suggested Citation