What Broker Charges Reveal About Subprime Mortgage Credit Risk

Abstract

Prior to the subprime crisis, mortgage brokers charged higher fees for subprime loans that turned out to be riskier ex post, even when conditioning on other risk characteristics. Borrowers who paid higher conditional fees were inherently more risky, not just because they paid higher fees. The association between conditional fees and delinquency risk was stronger for purchase rather than refinance loans, and for loans originated by brokers who had less frequent interactions with the lender. This work sheds light on how regulation that limits origination charges to a fixed fraction of the loan amount may impact mortgage lending.