The Pricing of Mortgages by Brokers: An Agency Problem?

Abstract

Mortgage brokers have grown in importance in the homemortgage origination process in recent years, suggesting theyprovide a valuable service matching borrowers and lenders,although their involvement has also been linked to the recentsurge in mortgage defaults and foreclosures. As in other marketsdominated by brokers, agents' incentives are often poorly alignedwith those with whom they do business, in this case both thelenders who bear the risks once the loan is originated and theconsumer who assumes liability for the debt and contract terms.This paper describes the institutional arrangements under whichmortgage brokers operate and empirically test whether loansoriginated by mortgage brokers are lower in cost than those thatwould be available directly from retail lenders. The resultssuggest that loans originated by brokers cost borrowers about 20basis points more, on average, than retail loans and that thispremium is higher for lower income and lower credit scoreborrowers.