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It’s understandable why people want to increase regulation of mortgage brokers, since many of them contributed to the housing bubble and bust by acting unscrupulously. But economics teaches us to beware of unintended consequences. New research indicates that at least one form of regulation of mortgage brokers could backfire.
The regulation in question is surety bonds or net worth requirements, which are intended to keep mortgage brokers honest by assuring that they have some skin in the game—real assets that can be taken from them if they screw up. But in a National Bureau of Economic Research working paper, Morris Kleiner of the University of Minnesota and Richard Todd of the Federal Reserve Bank say this:
In particular, we find that tighter bonding/net worth requirements are associated with fewer brokers, fewer subprime mortgages, higher foreclosure rates, and a greater percentage of high-interest-rate mortgages. Although we do not provide a full causal interpretation of these results, we take seriously the possibility that restrictive bonding requirements for mortgage brokers have unintended negative consequences for many consumers.
That’s kind of annoying. Especially because the authors don’t find much merit in other regulations. They say other ideas such as mandatory professional education “do not have a significant and consistent statistical association with market outcomes.” Translation: They don’t make much difference either way.
I see now that economist Tyler Cowen covered this on his blog Marginal Revolution.
Also, here’s a description from the National Assn. of Mortgage Brokers of the regulations its members face.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.