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Third Party Originators and Mortgage Prepayment Risk: An Agency Problem?

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Abstract

We focus on an agency problem encountered by mortgage lenders and investors in mortgage-backed securities when the underlying collateral is originated by third parties. Third parties, such as mortgage brokers, have economic incentives to encourage borrowers to refinance and, accordingly, their actions may affect asset values. We sketch the principal-agent problem and examine two sets of data. Results support the argument: loans originated by third parties are significantly more likely to prepay after controlling for other known determinants of termination risk. Moreover, third party loans are about three times as sensitive to refinancing incentives, compared to retail loans.

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  • Michael LaCour-Little & Gregory H. Chun, 1999. "Third Party Originators and Mortgage Prepayment Risk: An Agency Problem?," Journal of Real Estate Research, American Real Estate Society, vol. 17(1), pages 55-70.
  • Handle: RePEc:jre:issued:v:17:n:1:1999:p:55-70
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    References listed on IDEAS

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    1. McConnell, John J & Singh, Manoj, 1994. " Rational Prepayments and the Valuation of Collateralized Mortgage Obligations," Journal of Finance, American Finance Association, vol. 49(3), pages 891-921, July.
    2. Patric H. Hendershott & Robert Van Order, 1987. "Pricing Mortgages: An Interpretation of the Models and Results," NBER Working Papers 2290, National Bureau of Economic Research, Inc.
    3. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
    4. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1996. "The effect of income and collateral constraints on residential mortgage terminations," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 235-261, June.
    5. Quigley, John M, 1987. "Interest Rate Variations, Mortgage Prepayments and Household Mobility," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 636-643, November.
    6. 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.
    7. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-392, June.
    8. Deng, Yongheng & Quigley, John M. & Van Order, Robert & Mac, Freddie, 1996. "Mortgage default and low downpayment loans: The costs of public subsidy," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 263-285, June.
    9. S. Peristiani & P. Bennett & G. Monsen & R. Peach & J. Raiff, 1996. "Effects of household creditworthiness on mortgage refinancings," Research Paper 9622, Federal Reserve Bank of New York.
    10. Green, Jerry & Shoven, John B, 1986. "The Effects of Interest Rates on Mortgage Prepayments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 41-59, February.
    11. Pan Kang & Stavros A. Zenios, 1992. "Complete Prepayment Models for Mortgage-Backed Securities," Management Science, INFORMS, vol. 38(11), pages 1665-1685, November.
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    Cited by:

    1. Jonathan Spader & Roberto Quercia, 2011. "Mortgage Brokers and the Refinancing Transaction: Evidence from CRA Borrowers," The Journal of Real Estate Finance and Economics, Springer, vol. 42(2), pages 181-210, February.
    2. 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.
    3. 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.
    4. Steinbuks, Jevgenijs, 2015. "Effects of prepayment regulations on termination of subprime mortgages," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 445-456.
    5. Kandrac, John & Schlusche, Bernd, 2015. "An agency problem in the MBS market and the solicited refinancing channel of large-scale asset purchases," Finance and Economics Discussion Series 2015-27, Board of Governors of the Federal Reserve System (U.S.).
    6. Elliehausen, Gregory & Staten, Michael E. & Steinbuks, Jevgenijs, 2008. "The effect of prepayment penalties on the pricing of subprime mortgages," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 33-46.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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