Financial Literacy, Broker–Borrower Interaction and Mortgage Default

Abstract

This article examines the relationship between broker-borrower interaction in the origination process and subsequent mortgage performance. I show that face-to-face interaction between a mortgage broker and borrower before the loan funds is associated with lower levels of ex post default. The relation between face-to-face broker-borrower interaction and mortgage performance holds only for borrowers that have characteristics associated with low levels of financial literacy. Specifically, face-to-face interaction is negatively related to default for minorities, borrowers located in areas with low levels of education, low-income borrowers and borrowers with low FICO scores. My results suggest that face-to-face interaction between the mortgage broker and borrower may reduce problems associated with financial illiteracy.

Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market

“…) We focus on first‐lien loans with complete servicing data that were originated through the mortgage broker channel between 1998 and 2005. Following Conklin (), to limit the effect of outliers and data entry errors, we exclude loans for which: (1) total fees are negative or greater than 15% of the loan amount; (2) the yield spread premium paid from the bank to the broker is negative or greater than 5% of the loan amount; (3) the combined LTV at origination is negative or greater than 125%; (4) the borrower's FICO score is less than 450 or greater than 850; (5) the borrower's DTI ratio is negative or greater than 60%; (6) the borrower's monthly income is negative or greater than $26,900; and (7) borrower age is less than 18 or greater than 99. The final sample includes 458,872 funded mortgage loans.…”

Factors underlying short sales

“…Short sales vary positively with credit scores, but whether this arises due to financial literacy (Agarwal et al, 2014;Conklin, 2014), social status (Clark et al, 2014), or perceptions that lead to lender-friendly behavior (Seiler, 2014) would be a topic for further research. In addition, potential for short sale fraud can have a material impact on its possible use as a means of efficiently handling borrower financial distress.…”

Feeling comfortable with a mortgage: The impact of framing, financial literacy and advice

“…Studies also disagree about the benefit or detriment of consulting a broker. Broker advice can reduce search costs and help with the mortgage process (Conklin 2017). However, agency problems, including racial factors, can mean that brokered mortgages are more expensive and have higher fees (Ambrose et al 2021;LaCour-Little 2009;Robles-Garcia 2020;Woodward and Hall 2012).…”