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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.

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Households, Intermediaries and Originators in Mortgage Markets

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  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.

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