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Minimizing predatory lending: Designing a long-term compensation structure to minimize the actions of opportunistic mortgage brokers

Author

Listed:
  • Patrick Payne

    (Texas Tech University)

  • Tammy Huffman Ph.D

    (Utah Valley University)

Abstract

This paper addresses the inadequacies in the current compensation structure for mortgage brokers, and asserts that the resulting opportunistic behavior by brokers played a major role in the 2008 collapse of the mortgage market. We utilize agency theory as an underpinning to suggest that increased regulation will have only a limited impact on self-serving behavior due to the complex information asymmetries possessed by brokers. We posit that a restructured long-term compensation package would be effective in aligning the interests of borrowers and brokers, ultimately reducing the level of mortgage defaults and foreclosures.

Suggested Citation

  • Patrick Payne & Tammy Huffman Ph.D, 2012. "Minimizing predatory lending: Designing a long-term compensation structure to minimize the actions of opportunistic mortgage brokers," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(5), pages 8-19, October.
    • Handle: RePEc:mir:mirbus:v:2:y:2012:i:5:p:8-19
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    References listed on IDEAS

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    1. Jean Jinghan Chen & Haitao Zhang & Xinrong Xiao & Weian Li, 2011. "Financial crisis and executive remuneration in banking industry - an analysis of five British banks," Applied Financial Economics, Taylor & Francis Journals, vol. 21(23), pages 1779-1791.
    2. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
    3. Gerald Lander & Katherine Barker & Margarita Zabelina & Tiffany Williams, 2009. "Subprime Mortgage Tremors: An International Issue," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 15(1), pages 1-16, February.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Antje Berndt & Burton Hollifield & Patrik Sandås, 2010. "The Role of Mortgage Brokers in the Subprime Crisis," NBER Working Papers 16175, National Bureau of Economic Research, Inc.
    6. Bond, Philip & Musto, David K. & Yilmaz, Bilge, 2009. "Predatory mortgage lending," Journal of Financial Economics, Elsevier, vol. 94(3), pages 412-427, December.
    7. repec:kap:iaecre:v:15:y:2009:i:1:p:1-16 is not listed on IDEAS
    8. Andrew Hertzberg & Jose Maria Liberti & Daniel Paravisini, 2010. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation," Journal of Finance, American Finance Association, vol. 65(3), pages 795-828, June.
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