Abstract
Changes in the mortgage industry have been swiftly effected over the past few years. Many of the changes have come about as a response to the high level of observed delinquencies and defaults on residential mortgages as house prices plummeted, and others have evolved from continuing concerns about the treatment of borrowers during the mortgage origination process. The segmented mortgage industry of the early part of the decade, with loans being originated in the prime, subprime and government mortgage sectors, has been largely replaced with a bifurcated system. By year end 2010, the FHA/VA (government sector) combined with the conventional, conforming market share of originations was 90.8 %. In this paper, we examine some of the observed trends and changes in the types and levels of broker compensation that existed before the regulatory change that brought about the implementation of the Federal Reserve Board’s (FRB) new loan officer compensation rule. Among other questions, we examine the variance in broker compensation across geographies, across lenders, across borrower types, and across loan products. The intent of this ex post analysis is to provide an understanding of the potential impacts of the declining broker industry on both access to mortgage loans and on the pricing of mortgage originations.
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Notes
Inside Mortgage Finance Publications (2011), p. 21.
These fixed costs include the costs of internal loan officers, the bricks and mortar costs of branches, and the marketing strategies that allow a retail lender to differentiate their products from other lenders.
Loan officer compensation rules changed in April 2011.
Inside Mortgage Finance Publications (2011), pp. 143–151.
See, for example, Ramirez et al. v. GreenPoint Mortgage Funding, Inc., US District Court for the Northern District of California, Case 3:08-cv-00369-TEH and Rodriguez et al. v. First Franklin Financial Corporation, US District Court for the Northern District of California, Case 5:08-cv-01515-JW.
See United States v. AIG Federal Savings Bank and Wilmington Finance, Inc, US District Court, District of Delaware, Case 1:10-cv-00178-JJF.
The study includes an extensive discussion of previous literature on the principal–agent relationship that will not be reproduced here.
We remove loans with APRs greater than 20 and less than or equal to zero and broker fees or YSP greater than 10 %. We exclude loans not originated through traditional wholesale/broker or retail channels (e.g., correspondent loans).
The top 20 MSAs were chosen based on volumes from the 2006 HMDA. They include Atlanta, Baltimore, Chicago, Dallas, Denver, Houston, Las Vegas, Los Angeles, Miami, New York, Oakland, Orlando, Philadelphia, Phoenix, Riverside CA, San Diego, Seattle, Tampa, and Washington DC.
YSPs can either be paid as an upfront fee or be paid over time through a higher interest rate. In either way, they are captured in the APR calculation.
We also controlled for FSA/RHS loan, lien status, owner occupancy, MSA/MD or not, rural/urban, low income tracts, minority tract percentage and year. Other race categories were “missing,” and “other.” Odds ratios listed, with standard errors in parentheses are as follows: *Significant at 10 %, ** Significant at 5 %, and ***Significant at 1 %).
References
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The views expressed herein are those of the authors and do not necessarily reflect the views of Charles River Associates or its Board of Directors or Freddie Mac or its Board of Directors or its regulators. We thank Daniel Broxterman for helpful comments.
Inside Mortgage Finance Publications (2011), p. 20.
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Courchane, M.J., Darolia, R. & Zorn, P.M. Broker Compensation Patterns and Trends: 2005–2009. Atl Econ J 40, 229–251 (2012). https://doi.org/10.1007/s11293-012-9323-5
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DOI: https://doi.org/10.1007/s11293-012-9323-5