Mortgage Risk Exposure and the Effect of Broker Involvement
36 Pages Posted: 20 Jun 2011 Last revised: 18 May 2017
Date Written: April 1, 2013
This paper examines how broker involvement in during mortgage origination affects the leverage of borrowers. Using loan-to-value and debt-coverage-ratios of mortgages, we document that despite commission incentives being present, broker involvement is not systematically related to increases in borrower leverage after accounting for heterogeneity among lenders. Since we use a recourse-market with low securitization-rates, we examine broker behavior if both lender and borrower screening and monitoring incentives are reduced through mortgage insurance. Again we do not find that removal of credit risk leads to brokers increasing leverage on borrowers. Various robustness checks that account for heterogeneity in borrower experience, risk preferences and endogenous selection do not change these results. The implications for and effectiveness of banning commission-based broker incentives is discussed..
Keywords: mortgage brokers, screening incentives, mortgage lenders, broker monitoring, mortgage insurance
JEL Classification: E50, G21, R20
Suggested Citation: Suggested Citation