Mortgage Brokers and Mortgage Rate Spreads: Their Pricing Influence Depends on Neighborhood Type

Abstract

Public interest groups believe mortgage brokers, as indirect or third-party lenders, are largely responsible for most reported high interest rate loans. Well-developed principal-agent theory suggests mortgage brokers are incented to solicit applications that are both creditworthy and where the broker has an informational advantage. Using census tract level data for 2005, we find the relation between mortgage broker concentration, loan pricing, and approval rates depends on the lien type and several other correlated control factors. After grouping census tracts into similar neighborhoods, we identify 14 distinct cluster groupings. At the cluster level, we find mortgage broker concentration has different effects on loan pricing and approval rates, depending on the type of neighborhood. We demonstrate that clustering at the neighborhood level, rather than regressing across the entire population, proves key to evaluating the relation.