NBER WORKING PAPER SERIES
THE ROLE OF MORTGAGE BROKERS IN THE SUBPRIME CRISIS Antje Berndt Burton Hollifield Patrik Sandås Working Paper 16175 http://www.nber.org/papers/w16175
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2010
We are grateful for financial support from the McIntire Center for Financial Innovation. We thank Sonny Bringol of Victorian Finance, LLC and Paul Allen of Oakmont Advisors, LLC for helpful discussions about the structure of the mortgage market and Michael Gage of IPRecovery for help with the New Century database. We are grateful to Vijay Bhasin, Bo Becker, Amit Seru, Amir Sufi and seminar participants at Aalto University, Carnegie Mellon University, Case Western University, Copenhagen Business School, Federal Reserve Bank of Chicago, Hanken School of Economics, HEC Paris, Insead, SIFR, UC Berkeley, UNC Chapel Hill, University of Waterloo, Wilfrid Laurier University, the NBER Securitization Meeting, the third McGill/IFM2 Risk Management Conference, and the NBER Financial Institutions and Market Risk Conference for useful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2010 by Antje Berndt, Burton Hollifield, and Patrik Sandås. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Role of Mortgage Brokers in the Subprime Crisis Antje Berndt, Burton Hollifield, and Patrik Sandås NBER Working Paper No. 16175 July 2010 JEL No. G12,G18,G21,G32 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.
Antje Berndt Carnegie Mellon University Tepper School of Business 5000 Forbes Avenue Pittsburgh, PA 15213 email@example.com Burton Hollifield Carnegie Mellon University Tepper School of Business 5000 Forbes Avenue Pittsburgh, PA 15213 firstname.lastname@example.org
Patrik Sandås University of Virginia McIntire School of Commerce P.O. Box 400173 Charlottesville, VA, 22904 email@example.com
Mortgage brokers act as ﬁnancial intermediaries matching borrowers with lenders, assisting in the selection of loans, and completing the loan application process. Mortgage brokers became the predominant channel for loan origination in the subprime market. For example, in 2005 independent mortgage brokers originated about 65% of all subprime mortgages.1 Despite the mortgage brokers’ central role in the subprime market, little is known about their behavior and incentives, nor about the types of loans, borrowers, or properties that generated proﬁts for the brokers. We study the role of independent brokers in the mortgage origination process using a dataset from one large subprime lender, New Century Financial Corporation, whose rapid rise and fall parallels that of the subprime mortgage market from the mid nineties until the beginning of the subprime crisis in 2007. Figure 1 plots the loan volume originated by New Century between 1997 and...
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