Households, Intermediaries and Originators in
Mortgage Markets
ERES Annual Meeting 2012, Edinburgh
Ruben H.G.M. Cox
Rotterdam School of Management, Erasmus University
Mortgage lending
The compensation structure of intermediaries
Mortgage production (€/year) € 0 - € 2.5 million € 2.5 - € 5 million
Bonus
€ 5 - € 10 million
0%
0.20%
0.25%
Traditional mortgage products
Linear mortgage
0.75%
0.95%
1.00%
Alternative mortgage products
Savings mortgage
Endowment mortgage
Life-insurance mortgage
2.50%
2.25%
2.25%
2.50%
2.45%
2.45%
2.50%
2.50%
2.50%
Source: Ecorys, 2004
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.
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
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.
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 administered since 2002
– Only first mortgages originated after 2001 are included in the sample.
•
Excesses based on underwriting standards published by NIBUD (Institute for
Budget Education) and National Mortgage Guarantee (NHG).
Descriptive statistics (1)
Insured
Mean
N
Eligible/not-insured
Mean
N
Non-eligible
Mean
N
Loan-to-value ratio
Intermediated
Direct written
98.5%
91.8%
131
84
87.4%
87.7%
115
98
100.0%
88.0%
424
318
Debt-service ratio
Intermediated
Direct written
28.0%
23.7%
109
70
28.4%
25.6%
97
83
22.4%
18.4%
549
395
Source: DNB Household Survey
Descriptive statistics (2)
Variables
Interest rate
Fixed rate period (1 = yes)
NHG-insured (1 = yes)
Log(propertyvalue)
Log (household income)
Log (amount of mortgage)
Direct written
Mean Std. Dev.
4.7%
0.01
88.8%
0.32
28.6%
0.45
4.87
0.68
10.50
0.43
4.86
0.66
N
660
741
742
737
742
589
Mean
4.6%
90.3%
36.8%
4.85
10.40
5.01
Intermediated
Std. Dev
0.01
0.30
0.48
0.63
0.46
0.53
N
1025
1151
1153
1144
1152
865
T-stat for
mean diff.
2.76***
-1.02
-3.70***
0.68
4.44***
-4.60***
Specification of regression model
•
General OLS-model:
𝑅𝑎𝑡𝑖𝑜𝑖 = 𝛼 + 𝛽𝑑𝐼𝑛𝑡𝑒𝑟𝑚𝑒𝑑𝑖𝑎𝑟𝑦 + 𝜔𝑡 𝑑𝑌𝑒𝑎𝑟𝑡 + 𝛾𝑋𝑖 + 𝜂𝑖
•
Ratioi is either LTV or DSR ratio for household i
•
Main variable of interest is dIntermediary
•
Control variables in X:
– Mortgage characteristics (fixed rate dummy, interest rate, mortgage
guarantee)
– Household characteristics (composition, education, income, value
collateral, wealth, gender, marital status etc.)
•
‘Excess’ analysis is based on a logit-model
Results (1): Full sample
(1)
LTV
0.037**
[2.21]
(2)
DSR
0.000
[0.02]
Controls
Yes
Yes
Yes
Yes
Year dummies
Yes
Yes
Yes
Yes
1333
0.303
-
1521
0.509
-
1333
0.164
-700.6
1521
0.303
-402.0
Intermediated (1 = yes)
N
R2-adj/Pseudo R2
Log-Likelihood
(3)
(4)
ExcessLTV ExcessDSR
0.331**
-0.235
[2.15]
[-1.15]
Mortgage controls: fixed rate-period, interest rate, mortgage-guarantee,
mortgage type
Demographic controls: household composition, education, income, value
collateral, wealth, gender, marital status, retired
Results (2): Results by originator
Banks
Non-Banks
LTV
0.019
[0.92]
DSR
0.008
[1.10]
LTV
0.045
[0.94]
DSR
-0.005
[-0.32]
Controls
Yes
Yes
Yes
Yes
Year dummies
Yes
Yes
Yes
Yes
N
R2-adj
731
0.339
812
0.493
602
0.260
709
0.536
Intermediated (1 = yes)
Insignificant results are also found for the logit-analysis (underwriting-excesses)
Mortgage controls: fixed rate-period, interest rate, mortgage-guarantee, mortgage type
Demographic controls: household composition, education, income, value collateral, wealth, gender,
marital status, retired
Results (3): Results by originator for insured mortgages
Intermediated (1 = yes)
Loan-to-value ratio
Full sample
Banks
Non-Banks
0.067**
0.060*
0.091
[2.51]
[1.93]
[1.32]
Debt-service-ratio
Full sample Banks
Non-Banks
0.014
0.010
0.030
[1.56]
[0.85]
[1.25]
Controls
Yes
Yes
Yes
Yes
Yes
Yes
Year dummies
Yes
Yes
Yes
Yes
Yes
Yes
N
R2-adjusted
454
0.151
241
0.154
213
0.160
483
0.586
242
0.604
241
0.597
Involvement intermediary increases household LTV-ratio by 6-7 percent
Results (4): Results by originator for uninsured mortgages
Intermediated (1 = yes)
Controls
Year dummies
N
R2-adjusted
Loan-to-value ratio
Full sample Banks Non-Banks
0.026
0.004
0.023
[1.15]
[0.17]
[0.41]
Yes
Yes
Yes
Yes
879
0.320
Yes
490
0.365
Yes
389
0.298
Debt-service-ratio
Full sample
Banks Non-Banks
-0.006
0.007
-0.020
[-0.75]
[0.73]
[-1.02]
Yes
Yes
Yes
Yes
1038
0.489
Involvement of broker is insignificant when mortgages are not insured
Yes
570
0.472
Yes
468
0.528
Economic significance
•
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.
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
Conclusions and implications
•
Originator screening incentives and broker monitoring are maintained for uninsured
mortgages but appear to weaker for insured mortgages;
•
Limited evidence that households are expropriated by brokers;
•
Mortgage insurer is the ‘victim’ of the compensation incentives;
•
Redesign the insurance contract to a deductibles/coinsurance structure with the
lender.