Working Paper: NBER ID: w16175
Authors: Antje Berndt; Burton Hollifield; Patrik Sands
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.
Keywords: mortgage brokers; subprime crisis; broker profits
JEL Codes: G12; G18; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| yield spread premium (G12) | broker behavior (L85) |
| stricter state regulations (K23) | broker profits (G24) |
| broker profits (G24) | loan performance (G51) |
| broker profits (G24) | loan delinquency (G51) |
| abnormally high broker fees (G24) | delinquency hazard rate (G33) |
| high yield spread premiums (G12) | delinquency hazard rate (G33) |
| broker profits (G24) | riskiness of loans (G21) |