IDEAS home Printed from https://ideas.repec.org/a/kap/jrefec/v63y2021i2d10.1007_s11146-020-09774-5.html
   My bibliography  Save this article

What Broker Charges Reveal About Subprime Mortgage Credit Risk

Author

Listed:
  • Antje Berndt

    (Australian National University)

  • Burton Hollifield

    (Carnegie Mellon University)

  • Patrik Sandås

    (University of Virginia)

Abstract

Prior to the subprime crisis, mortgage brokers charged higher fees for subprime loans that turned out to be riskier ex post, even when conditioning on other risk characteristics. Borrowers who paid higher conditional fees were inherently more risky, not just because they paid higher fees. The association between conditional fees and delinquency risk was stronger for purchase rather than refinance loans, and for loans originated by brokers who had less frequent interactions with the lender. This work sheds light on how regulation that limits origination charges to a fixed fraction of the loan amount may impact mortgage lending.

Suggested Citation

  • Antje Berndt & Burton Hollifield & Patrik Sandås, 2021. "What Broker Charges Reveal About Subprime Mortgage Credit Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 63(2), pages 280-326, August.
    • Handle: RePEc:kap:jrefec:v:63:y:2021:i:2:d:10.1007_s11146-020-09774-5
    DOI: 10.1007/s11146-020-09774-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11146-020-09774-5
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11146-020-09774-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michael LaCour-Little, 2009. "The Pricing of Mortgages by Brokers: An Agency Problem?," Journal of Real Estate Research, American Real Estate Society, vol. 31(2), pages 235-264.
    2. McCall, Brian P, 1996. "Unemployment Insurance Rules, Joblessness, and Part-Time Work," Econometrica, Econometric Society, vol. 64(3), pages 647-682, May.
    3. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(2), pages 233-263, June.
    4. John M. Clapp & Yongheng Deng & Xudong An, 2006. "Unobserved Heterogeneity in Models of Competing Mortgage Termination Risks," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(2), pages 243-273, June.
    5. Marsha J. Courchane & Brian J. Surette & Peter M. Zorn, 2004. "Subprime Borrowers: Mortgage Transitions and Outcomes," The Journal of Real Estate Finance and Economics, Springer, vol. 29(4), pages 365-392, December.
    6. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    7. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    8. Ambrose, Brent W & Capone, Charles A, 2000. "The Hazard Rates of First and Second Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 275-293, May.
    9. Sueyoshi, Glenn T., 1992. "Semiparametric proportional hazards estimation of competing risks models with time-varying covariates," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 25-58.
    10. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    11. Yongheng Deng & Andrey D. Pavlov & Lihong Yang, 2005. "Spatial Heterogeneity in Mortgage Terminations by Refinance, Sale and Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 739-764, December.
    12. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
    13. Dawson, Chris & Henley, Andrew, 2012. "Something will turn up? Financial over-optimism and mortgage arrears," Economics Letters, Elsevier, vol. 117(1), pages 49-52.
    14. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-299, August.
    15. Heuson, Andrea & Passmore, Wayne & Sparks, Roger, 2001. "Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 337-363, November.
    16. Susan E. Woodward & Robert E. Hall, 2012. "Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence," American Economic Review, American Economic Association, vol. 102(7), pages 3249-3276, December.
    17. James B. Kau & Donald C. Keenan & Taewon Kim, 1993. "Transaction Costs, Suboptimal Termination and Default Probabilities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 247-263, September.
    18. Adam J. Levitin & Desen Lin & Susan M. Wachter, 2020. "Mortgage Risk Premiums during the Housing Bubble," The Journal of Real Estate Finance and Economics, Springer, vol. 60(4), pages 421-468, May.
    19. Cynthia J. Pahl, 2007. "A compilation of state mortgage broker laws and regulations, 1996-2006," Community Affairs Report 2007-2, Federal Reserve Bank of Minneapolis.
    20. Deng, Yongheng, 1997. "Mortgage Termination: An Empirical Hazard Model with a Stochastic Term Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 309-331, May.
    21. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    22. Brent W. Ambrose & James N. Conklin, 2014. "Mortgage Brokers, Origination Fees, Price Transparency and Competition," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 363-421, June.
    23. Pennington-Cross, Anthony, 2003. "Credit History and the Performance of Prime and Nonprime Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 279-301, November.
    24. Titman, Sheridan D & Torous, Walter N, 1989. " Valuing Commercial Mortgages: An Empirical Investigation of the Contingent-Claims Approach to Pricing Risky Debt," Journal of Finance, American Finance Association, vol. 44(2), pages 345-373, June.
    25. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    26. Calhoun, Charles A & Deng, Yongheng, 2002. "A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 9-33, Jan.-Marc.
    27. Ho, Giang & Pennington-Cross, Anthony, 2006. "The impact of local predatory lending laws on the flow of subprime credit," Journal of Urban Economics, Elsevier, vol. 60(2), pages 210-228, September.
    28. Andrey Pavlov & Susan Wachter, 2009. "Mortgage Put Options and Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 89-103, January.
    29. Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Berndt, Antje & Hollifield, Burton & Sandås, Patrik, 2017. "What Broker Charges Reveal about Mortgage Credit Risk," Working Paper Series 336, Sveriges Riksbank (Central Bank of Sweden).
    2. repec:zbw:bofrdp:2009_035 is not listed on IDEAS
    3. Demyanyk, Yuliya & Hasan, Iftekhar, 2009. "Financial crises and bank failures: a review of prediction methods," Bank of Finland Research Discussion Papers 35/2009, Bank of Finland.
    4. Demyanyk, Yuliya & Hasan, Iftekhar, 2010. "Financial crises and bank failures: A review of prediction methods," Omega, Elsevier, vol. 38(5), pages 315-324, October.
    5. Demyanyk, Yuliya & Hasan, Iftekhar, 2010. "Financial crises and bank failures: A review of prediction methods," Omega, Elsevier, vol. 38(5), pages 315-324, October.
    6. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    7. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    8. Sumit Agarwal & Yongheng Deng & Jia He, 2020. "Time Preferences, Mortgage Choice and Mortgage Default," International Real Estate Review, Global Social Science Institute, vol. 23(2), pages 151-187.
    9. Sumit Agarwal & Yongheng Deng & Jia He, 2020. "Time Preferences, Mortgage Choice and Mortgage Default," International Real Estate Review, Global Social Science Institute, vol. 23(2), pages 777-813.
    10. Steinbuks, Jevgenijs, 2015. "Effects of prepayment regulations on termination of subprime mortgages," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 445-456.
    11. Dror Parnes, 2023. "Typical States and Their Risks for Mortgage Loans," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 21(2), pages 395-415, June.
    12. Bo Liu & Tien Foo Sing, 2018. "“Cure” Effects and Mortgage Default: A Split Population Survival Time Model," The Journal of Real Estate Finance and Economics, Springer, vol. 56(2), pages 217-251, February.
    13. Jian Chen & Jin Xiang & Tyler T. Yang, 2018. "Re-Default Risk of Modified Mortgages," International Real Estate Review, Global Social Science Institute, vol. 21(1), pages 1-40.
    14. Xudong An & Yongheng Deng & Eric Rosenblatt & Vincent Yao, 2012. "Model Stability and the Subprime Mortgage Crisis," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 545-568, October.
    15. Anthony Pennington‐Cross & Giang Ho, 2010. "The Termination of Subprime Hybrid and Fixed‐Rate Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 399-426, September.
    16. James Kau & Donald Keenan & Constantine Lyubimov, 2014. "First Mortgages, Second Mortgages, and Their Default," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 561-588, May.
    17. Xudong An & John Clapp & Yongheng Deng, 2010. "Omitted Mobility Characteristics and Property Market Dynamics: Application to Mortgage Termination," The Journal of Real Estate Finance and Economics, Springer, vol. 41(3), pages 245-271, October.
    18. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, vol. 108(1), pages 29-45.
    19. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," FRB Atlanta Working Paper 2009-10, Federal Reserve Bank of Atlanta.
    20. James Kau & Donald Keenan & Xiaowei Li, 2011. "An Analysis of Mortgage Termination Risks: A Shared Frailty Approach with MSA-Level Random Effects," The Journal of Real Estate Finance and Economics, Springer, vol. 42(1), pages 51-67, January.
    21. Sumit Agarwal & Brent W. Ambrose & Souphala Chomsisengphet & Chunlin Liu, 2011. "The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 633-655, June.

    More about this item

    Keywords

    Mortgage brokers; Loan performance; Subprime crisis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jrefec:v:63:y:2021:i:2:d:10.1007_s11146-020-09774-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.