Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 336: What Broker Charges Reveal about Mortgage Credit Risk

Antje Berndt (), Burton Hollifield () and Patrik Sandås ()
Additional contact information
Antje Berndt: Australian National University, Postal: GPO Box 1535, Canberra, ACT 2601
Burton Hollifield: Carnegie Mellon University, Postal: 5000 Forbes Avenue, Pittsburgh, PA 15213
Patrik Sandås: SIFR, Postal: Swedish House of Finance, Drottninggatan 98, 111 60 Stockholm

Abstract: Prior to the subprime crisis, mortgage brokers charged higher percentage fees for loans that turned out to be riskier ex post, even when conditioning on other risk characteristics. High conditional fees reveal borrower attributes that are associated with high borrower risk, such as suboptimal shopping behavior, high valuation for the loan or high borrower-specific broker costs. Borrowers who pay high conditional fees are inherently more risky, not just because they pay high fees. We find a stronger association between conditional fees and delinquency risk when lenders have fewer incentives to screen bor- rowers, for purchase rather than refinance loans, and for loans originated by brokers who have less frequent interactions with the lender. Our findings shed light on the pro- posed QRM exemption criteria for risk retention requirements for residential mortgage securitizations.

Keywords: Mortgage brokers; Loan performance; Subprime crisis; Credit risk retention; Qualied residential mortgages

JEL-codes: G12; G18; G21; G32

70 pages, February 1, 2017

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