The Effect of Mortgage Broker Licensing under the Originate-to-Distribute Model: Evidence from the U.S. Mortgage Market

Abstract

By exploiting state-level variations in mortgage broker licensing regulations, we examine how licensing requirements affect mortgage loan performances and the mortgage origination market. Using data on private label securitized loans, we find that loans in states with a toughened broker licensing had a smaller increase in default rates. This effect is larger in the years leading up to the financial crisis, for borrowers with lower credit scores, cash-out-refinance loans, high-minority neighborhoods, and loans originated by nonbanks. The improved performance with toughened broker licensing is only partially reflected in loan pricing. Stronger broker licensing requirements have slightly positive effects on the mortgage approval rates, and are associated with overall less risky borrowers and loan characteristics in applications and in originations.

Keywords: mortgage, securitization, brokers, information asymmetry, moral hazard, incentives, occupational licensing

JEL Classification: D82, G21, G28, J44, L1