Mortgage Risk Exposure and the Effect of Broker Involvement

This paper examines the effect of broker involvement on the LTV and DSR-ratios of mortgages. We show that after controlling for heterogeneity in underwriting standards among lenders, no marginal impact of brokers on debt-ratios is found, despite volume-based commission incentives. This is consistent with the idea that lenders only fund mortgages that conform to their credit standards, irrespective of broker involvement. Second, we test whether the availability of mortgage insurance alters these findings, as mortgage insurance can reduce loan screening and broker monitoring incentives in a similar fashion as securitization (Keys et al. 2010) through the transfer of credit risks. Again, the involvement of brokers is insignificant on debt-ratios. Our findings indicate that lender regulation is probably more effective in mitigating conflicts of interest between households and brokers, than changing compensation schemes or increasing broker regulation.