How would tighter regulation affect mortgage origination?

Here’s one paper suggesting that regulation doesn’t necessarily solve current problems:

We find that most aspects of mortgage broker licensing systems, such as mandatory professional education, do not have a significant and consistent statistical association with market outcomes. However, one component — the requirement in many states that mortgage brokers maintain a surety bond or minimum net worth — does have a significant and fairly consistent statistical relationship with both labor and consumer market outcomes. 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. On balance, our results also seem to support theories of occupational licensing that stress the importance of pure entry and exit barriers over those that focus more on the human capital effects of licensing.

Get that?  Tighter regulation does mean fewer subprime mortgages, but also higher foreclosure rates and higher interest rates on the mortgages.  This paper is hardly the final word, if only because broker licensing is not the only possible means of regulation.  But in the meantime caution is in order; don’t be attracted to the idea of tighter regulation simply because you feel we haven’t had good enough regulation so far.  Regulators are famous for fighting the last war, not preventing the crisis to come.

So far I’m not finding an ungated copy of this paper.


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