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March 4, 2011

Really Chicago Fed? Big banks are better than mortgage banks at lending?

March 4, 2011

Really Chicago Fed? Big banks are better than mortgage banks at lending?

The Chicago Fed published a paper that focuses on how competition among lenders affects mortgage loan characteristics. According to the study, banks issue safer mortgages than independent mortgage banks. Further, mortgages from banks with a branch in the local market where the property is tend to be safer than mortgages from banks without a local branch. Interestingly, changes in market shares among lender types (local bank, non-local bank, or independent mortgage bank) that lead to higher loan risk also are associated with better borrower quality.

Mortgage bankers will disagree using two arguments: (1) the concentration of senior-level loan officers is higher within mortgage banks, and (2) mortgage banks are selling much of their paper to big banks anyway—which means they’re underwriting to the same standards as banks, and often more strict to ensure that the big banks won’t reject any loan purchases.