What Broker Charges Reveal About Mortgage Credit Risk

61 Pages Posted: 22 Mar 2010 Last revised: 26 Sep 2014

Antje Berndt

Australian National University

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Patrik Sandås

University of Virginia

Multiple version iconThere are 3 versions of this paper

Date Written: September 25, 2014

Abstract

Prior to the subprime crisis, mortgage brokers charged higher percentage fees for loans that turned out to be riskier ex post, even when conditioning on other risk characteristics. High conditional fees reveal borrower attributes that are associated with high borrower risk, such as suboptimal shopping behavior, high valuation for the loan or high borrower-specific broker costs. Borrowers who pay high conditional fees are inherently more risky, not just because they pay high fees. We find a stronger association between conditional fees and delinquency risk when lenders have fewer incentives to screen borrowers, for purchase rather than refinance loans, and for loans originated by brokers who have less frequent interactions with the lender. Our findings shed light on the proposed QRM exemption criteria for risk retention requirements for residential mortgage securitizations.

Keywords: Mortgage brokers, Loan performance, Subprime crisis, Credit risk retention, Qualified residential mortgages

JEL Classification: G12, G18, G21, G32

Suggested Citation

Berndt, Antje and Hollifield, Burton and Sandås, Patrik, What Broker Charges Reveal About Mortgage Credit Risk (September 25, 2014). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1573312 or http://dx.doi.org/10.2139/ssrn.1573312

Antje Berndt (Contact Author)

Australian National University ( email )

Kingsley st.
acton, ACT 0200
Australia

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Patrik Sandas

University of Virginia ( email )

McIntire School of Commerce
Charlottesville, VA 22904
United States
1-434-243-2289 (Phone)

HOME PAGE: http://www.comm.virginia.edu/faculty_research/staff_directory/sandas.html

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