1 / 17

Households, Intermediaries and Originators in Mortgage Markets

Households, Intermediaries and Originators in Mortgage Markets. E RES Annual Meeting 2012 , Edinburgh Ruben H.G.M. Cox Rotterdam School of Management, Erasmus University. Mortgage lending. The compensation structure of intermediaries. Source : Ecorys , 2004. Research idea.

alida
Download Presentation

Households, Intermediaries and Originators in Mortgage Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Households, Intermediaries and Originators in Mortgage Markets ERES Annual Meeting 2012, Edinburgh Ruben H.G.M. Cox Rotterdam School of Management, Erasmus University

  2. Mortgage lending

  3. The compensationstructure of intermediaries Source: Ecorys, 2004

  4. Research idea • Why would a lender employ differential underwriting criteria for direct written and brokered mortgages? • If lender has risk (and reputational) exposure, then it has screening incentives; • E.g. non-insured mortgages • If risk is transferred (securitized or insured), then screening incentives might be weakened (Keys et al., 2010; Avery et al., 2006); • E.g. insured mortgages • So brokers can only work within the acceptability criteria of the lender if lenders have risk exposure.

  5. Measuring the outcome of underwriting process • Driven by data availability; • Need a proxy for a ‘suitability’-standard (Inderst and Ottaviani, 2009) • Loan-to-value ratio: • Measure of indebtedness of household • Proxy for loss-given-default for originator/insurer • Debt-service-ratio: • Measure of affordability for household • Proxy for probability of default for originator/insurer

  6. Hypotheses Hypothesis 1 Intermediaries have an insignificant effect on LTV and DSR ratios if the mortgage is uninsured. Hypothesis 2 Intermediaries possibly have a positive effect on LTV and DSR for insured mortgages.

  7. Dataset • Data are from the DNB Household Survey (DHS): • Survey yearly administered among a representative sample of 2000 Dutch households; • The survey started in 1993; • Wide coverage of topics: work, wealth, income, housing, health, psychological concepts. • Origination channel is administeredsince 2002 • Only first mortgagesoriginatedafter 2001 are included in the sample. • Excessesbased on underwritingstandardspublishedby NIBUD (Institutefor Budget Education) and National MortgageGuarantee (NHG).

  8. Descriptivestatistics (1) Source: DNB Household Survey

  9. Descriptive statistics (2)

  10. Specification of regression model • General OLS-model: • Ratioiis either LTV or DSR ratio forhouseholdi • Main variable of interest is dIntermediary • Control variables in X: • Mortgagecharacteristics (fixedrate dummy, interest rate, mortgageguarantee) • Household characteristics (composition, education, income, valuecollateral, wealth, gender, marital status etc.) • ‘Excess’ analysis is based on a logit-model

  11. Results (1): Full sample Mortgagecontrols: fixedrate-period, interest rate, mortgage-guarantee, mortgage type Demographiccontrols: householdcomposition, education, income, valuecollateral, wealth, gender, maritalstatus, retired

  12. Results (2): Results by originator Insignificant results are also found for the logit-analysis (underwriting-excesses) Mortgagecontrols: fixedrate-period, interest rate, mortgage-guarantee, mortgage type Demographiccontrols: householdcomposition, education, income, valuecollateral, wealth, gender, maritalstatus, retired

  13. Results (3): Results by originator for insured mortgages Involvement intermediary increases household LTV-ratio by 6-7 percent

  14. Results (4): Results by originator for uninsuredmortgages Involvement of broker is insignificant when mortgages are not insured

  15. Economicsignificance • Is the monetary incentive large enough for the broker? • Assume 7 percent increase in debt-level for an insurable savings mortgage; • If 10 mortgages are 7 percent levered up, say from 250K -> 268K; • Additional broker income is 5400 euro or 8 percent increase; • Additional searching- and screening costs are small.

  16. Robustness checks • We account for endogenous channel selection by households: • IV-model yields similar results • We check for heterogeneity in risk-preferences, that might influence indebtedness: • No effect was found • It is examined whether intermediaries have an effect on the pricing of the credit (LaCour-Little, 1999): • No effect was found

  17. Conclusionsandimplications • Originator screening incentives and broker monitoring are maintainedforuninsuredmortgagesbut appeartoweakerforinsuredmortgages; • Limited evidencethathouseholds are expropriatedby brokers; • Mortgageinsurer is the ‘victim’ of the compensation incentives; • Redesign the insurance contract to a deductibles/coinsurancestructurewith the lender.

More Related