Financial Literacy, Broker-Borrower Interaction, and Mortgage Default

Abstract

This paper examines the relationship between broker-borrower interaction in the origination process and subsequent mortgage performance. I show that face-to-face interaction between a mortgage broker and borrower before the loan funds is associated with lower levels of ex post default. The relation between face-to-face broker-borrower interaction and mortgage performance holds only for borrowers that have characteristics associated with low levels of financial literacy. Specifically, face-to-face interaction is negatively related to default for minorities, borrowers located in areas with low levels of education, low-income borrowers, and borrowers with low FICO scores. My results suggest that face-to-face interaction between the mortgage broker and borrower may reduce problems associated with financial illiteracy.

Keywords: Financial Literacy, Mortgage Brokerage, Default