Essay regarding Subprime Turmoil

Subprime Crisis

NBER WORKING DAILY NEWS SERIES

THE ROLE OF MORTGAGE BROKERS IN THE SUBPRIME CATASTROPHE Antje Berndt Burton Hollifield Patrik Sandås Working Paper 16175 http://www.nber. org/papers/w16175

COUNTRYWIDE BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2010

We are thankful for economical support through the McIntire Center for Economic Innovation. We all thank Sonny Bringol of Victorian Finance, LLC and Paul Allen of Oakmont Advisors, LLC for beneficial discussions about the framework of the mortgage loan market and Michael Gauge of IPRecovery for aid in the New Hundred years database. We are grateful to Vijay Bhasin, Bo Becker, Amit Seru, Amir Sufi and seminar participants for Aalto School, Carnegie Mellon University, Case Western University, Copenhagen Organization School, Government Reserve Lender of Chicago, il, Hanken School of Economics, HEC Paris, Insead, SIFR, UC Berkeley, UNC Chapel Hill, University or college of Waterloo, Wilfrid Laurier University, the NBER Securitization Meeting, the next McGill/IFM2 Risikomanagement Conference, as well as the NBER Banking institutions and Industry Risk Convention for valuable comments. The views indicated herein will be those of the authors and do not necessarily indicate the opinions of the Nationwide Bureau of Economic Analysis. NBER operating papers are circulated pertaining to discussion and comment functions. They have certainly not been peerreviewed or recently been subject to the review by the NBER Table of Administrators that accompanies official NBER publications. © 2010 simply by Antje Berndt, Burton Hollifield, and Patrik Sandås. Most rights appropriated. Short parts of text, to never exceed two paragraphs, might be quoted without explicit authorization provided that full credit, including © see, is given for the source.

The Role of Mortgage Brokers in the Subprime Catastrophe Antje Berndt, Burton Hollifield, and Patrik Sandås NBER Working Daily news No . 16175 July 2010 JEL No . G12, G18, G21, G32 ABSTRACT Before the subprime turmoil, mortgage brokers came from about 65% of all subprime mortgages. But little is known about their habit during the runup to the catastrophe. Using info from New Century Monetary Corporation, we discover that agents earned an average revenue of $5, 300 per funded loan. We all decompose the broker income into a cost and money component and find evidence in line with brokers having market electricity. The profits received are different for different types of loans and vary with borrower, broker, regulation and neighborhood attributes. We associate the broker profits to the subsequent performance of the financial loans and show that brokers gained high profits on loans that turned into riskier former mate post.

Antje Berndt Carnegie Mellon College or university Tepper Institution of Organization 5000 Forbes Avenue Pittsburgh, PA 15213 [email protected] cmu. edu Burton Hollifield Carnegie Mellon University Tepper College of Organization 5000 Forbes Avenue Maryland, PA 15213 [email protected] cmu. edu

Patrik Sandås College or university of Virginia McIntire College of Trade P. O. Box 400173 Charlottesville, VETERANS ADMINISTRATION, 22904 [email protected] edu

1 .

Introduction

Mortgage brokers act as financial intermediaries complementing borrowers with lenders, helping in the number of loans, and completing the loan application procedure. Mortgage brokers started to be the predominant channel for loan origin in the subprime market. For instance , in 2005 independent lenders originated about 65% of subprime loans. 1 Inspite of the mortgage brokers' central role in the subprime market, tiny is known of the behavior and incentives, neither about the kinds of loans, debtors, or real estate that produced profits intended for the broker agents. We research the function of 3rd party brokers in the mortgage origination process using a dataset in one large subprime lender, Fresh Century Financial Corporation, whose rapid rise and fall season parallels that of the subprime mortgage marketplace from the the middle of nineties until the beginning of the subprime crisis in 2007. Figure 1 plots the loan volume level originated simply by New 100 years between 1997 and...