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The Role of Mortgage Brokers in the Subprime Crisis

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  • Antje Berndt
  • Burton Hollifield
  • Patrik Sandås

Abstract

Prior to the subprime crisis, mortgage brokers originated about 65% of all subprime mortgages. Yet little is known about their behavior during the runup to the crisis. Using data from New Century Financial Corporation, we find that brokers earned an average revenue of $5,300 per funded loan. We decompose the broker revenues into a cost and a profit component and find evidence consistent with brokers having market power. The profits earned are different for different types of loans and vary with borrower, broker, regulation and neighborhood characteristics. We relate the broker profits to the subsequent performance of the loans and show that brokers earned high profits on loans that turned out to be riskier ex post.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16175.

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Date of creation: Jul 2010
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Publication status: published as The Role of Mortgage Brokers in the Subprime Crisis , Antje Berndt, Burton Hollifield, Patrik Sandås. in Market Institutions and Financial Market Risk , Carey, Kashyap, Rajan, and Stulz. 2012
Handle: RePEc:nbr:nberwo:16175

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  1. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "Subprime refinancing: equity extraction and mortgage termination," Working Papers 2006-023, Federal Reserve Bank of St. Louis.
  2. 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.
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Cited by:
  1. Ben-David, Itzhak, 2011. "High Leverage and Willingness to Pay: Evidence from the Residential Housing Market," Working Paper Series 2011-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Morgan J. Rose, 2011. "Prepayment Penalties: Efficieny and Predation," UMBC Economics Department Working Papers 11-133, UMBC Department of Economics.
  3. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series WP-2010-17, Federal Reserve Bank of Chicago.
  4. Tomasz Piskorski & Amit Seru & James Witkin, 2013. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market," NBER Working Papers 18843, National Bureau of Economic Research, Inc.
  5. 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 3249-76, December.

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