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The Pricing of Mortgages by Brokers: An Agency Problem?

  • Michael LaCour-Little

    ()

    (California State University, Fullerton Fullerton, CA 92831)

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    Mortgage brokers have grown in importance in the home mortgage origination process in recent years suggesting they provide a valuable service matching borrowers and lenders, although their involvement has also been linked to the recent surge in mortgage defaults and foreclosures. As in other markets dominated by brokers, agents' incentives are often poorly aligned with those with whom they do business, in this case both the lenders who bear the risks once the loan is originated and the consumer who assumes liability for the debt and contract terms. In this paper, we describe the institutional arrangements under which mortgage brokers operate and empirically test whether loans originated by mortgage brokers are lower in cost than those that would be available directly from retail lenders. Results suggest loans originated by brokers cost borrowers about 20 basis points more, on average, than retail loans and that this premium is higher for lower-income and lower credit score borrowers.

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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol31n02/06.235_264.pdf
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    Article provided by American Real Estate Society in its journal journal of Real Estate Research.

    Volume (Year): 31 (2009)
    Issue (Month): 2 ()
    Pages: 235-264

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    Handle: RePEc:jre:issued:v:31:n:2:2009:p:235-264
    Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
    Web page: http://www.aresnet.org/
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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    1. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    2. Morris M. Kleiner & Richard M. Todd, 2009. "Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers," NBER Chapters, in: Studies of Labor Market Intermediation, pages 183-231 National Bureau of Economic Research, Inc.
    3. Marsha J. Courchane, 2007. "The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 399-440.
    4. Lisa L. Posey & Abdullah Yavas, 2007. "Screening equilibria in experimental markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 32(2), pages 147-167, December.
    5. R.C. Rutherford & T.M. Springer & A. Yavas, 2004. "The Impacts of Contract Type on Broker Performance: Submarket Effects," Journal of Real Estate Research, American Real Estate Society, vol. 26(3), pages 277-298.
    6. Morris M. Kleiner & Richard M. Todd, 2007. "Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers," NBER Working Papers 13684, National Bureau of Economic Research, Inc.
    7. Yavas, Abdullah, 1992. "Marketmakers versus matchmakers," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 33-58, March.
    8. 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.
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