Households, intermediaries and originators in mortgage markets

Is there a conflict of interest between households and mortgage intermediaries when originators keep mortgages on their balance sheet? This paper shows that in an originate-to-hold setting, intermediaries are not systematically underwriting mortgages that exceed acceptable underwriting criteria (in terms of loan-to-value and debt-service ratios) once controlled for the originator. Originators have an incentive to monitor the underwriting process, regardless whether an intermediary is involved during origination. If mortgages are insured, than the involvement of intermediaries raises LTV-ratios by 6-7 per cent compared to mortgages directly originated at banks or insurers. It is further found that mortgage underwritten by intermediaries, are more likely to be of a deferred amortization type. Although this is not necessarily an adverse outcome for the household, the combination of deferred amortization debt and increased LTV-ratios is a potential risk for insurers of mortgages.