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Wholesale, Alt-A Analyzed in University Report

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A report from Columbia University challenges the mortgage broker model and blames life experiences — not lender discrimination — for a disparity in delinquency between whites and minorities.

The paper, funded by the National Science Foundation, was published by the Columbia Business School, Finance and Economics Division. The authors were Columbia’s Wei Jiang; Ashlyn Aiko Nelson of Indiana University, School of Public and Environmental Affairs; and Edward Vytlacil of Yale University’s Department of Economics.

The findings were derived from a unique data set provided by a major national mortgage bank, a draft of the report said. The bank was among the nation’s top ten lenders in 2006 and “one of the fastest growing players in the mortgage market, specializing in low- and no-documentation loans.” About 30 percent of its originations were full documentation loans.

The unidentified bank originated 721,767 loans between January 2004 and February 2008.

The authors found that an agency problem between wholesale lenders and mortgage brokers resulted in lower quality broker originations. Delinquency rates on broker-originated loans were 50 percent higher than on direct originations.

The authors called this finding “a manifestation of the misalignment of incentives for brokers who issue loans on the bank’s behalf for commissions but do not bear the long-term consequences of low-quality loans.” They also noted that brokers delve deeper into the pool of subprime borrowers than direct lenders.

The report found that loans with low documentation were found to have delinquency that was five to eight percentage points higher than full documentation loans. Borrowers are likely to falsify their an Alt-A loans originated by brokers.

The study indicated that delinquency rates among Hispanics were “four to 11 percentage points higher” than for white borrowers. Black borrowers were likely to have delinquency levels that were “three to four percentage points higher.”

But the authors didn’t identify lender discrimination in their analysis as the culprit for the disparity in delinquency.

Instead, higher delinquency among minorities was attributed to “systematic differences between white and minority borrowers — such as information and experience disparities resulting from a lack of prior home buying experience or exposure to mainstream financial institutions.”

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