Third Party Originators and Mortgage Prepayment Risk: An Agency Problem?

Michael LaCour-Little () and Gregory H. Chun ()
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Michael LaCour-Little: CitiCorp Mortgage Inc. St. Louis, MO 63141, http://www.citicorp.com
Gregory H. Chun: University of Wisconsin, Madison Madison, WI 53706, http://www.wisc.edu/

Journal of Real Estate Research, 1999, vol. 17, issue 1, pages 55-70

Abstract: We focus on an agency problem encountered by mortgage lenders and investors in mortgage-backed securities when the underlying collateral is originated by third parties. Third parties, such as mortgage brokers, have economic incentives to encourage borrowers to refinance and, accordingly, their actions may affect asset values. We sketch the principal-agent problem and examine two sets of data. Results support the argument: loans originated by third parties are significantly more likely to prepay after controlling for other known determinants of termination risk. Moreover, third party loans are about three times as sensitive to refinancing incentives, compared to retail loans.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1999
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