The following I read on Freakonomics blog.

Blog reader Chris Harris raises an interesting question in an email to us: Why do mortgage brokers get paid everything up front when they originate a deal?

This sort of contract gives brokers terrible incentives. They just want to get a deal done. It matters very little to them whether the borrower eventually defaults or not. (It is possible that if their clients always go into foreclosure, then the lenders with whom they work will steer clear of them; but since most loans are sold off by the originating banks anyway, this mechanism is likely to be a very weak form of discipline.) We’ve written in the past about my student Zahi (Itzhak) Ben-David’s work on real estate fraud and the role that mortgage brokers played.

Chris Harris offers a simple solution to the problem: instead of paying mortgage brokers a lump sum when the deal closes, have them pay a small amount out of every mortgage payment. That way, the mortgage brokers will have a disincentive to initiate high-risk mortgages that are likely to default.

One has to be a little careful with this sort of solution, however, because if you pay the mortgage brokers a percentage of the mortgage payment, they will have an incentive to make the mortgage payment as high as possible, which is definitely not a good idea.

A simple alternative is to make the mortgage broker’s monthly payment a fixed percentage of the value of the loan. This isn’t perfect either, but it might be a step in the right direction.

Any thoughts?

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John Ford
John Ford
EXPERIENCE

Over the course of 20 years in the Boston downtown real estate market, John represented and sold numerous, condominiums, investment and development properties in Greater Boston and in the surrounding suburbs



In addition to representing Boston condo buyers and sellers, John is currently one of the most recognized Boston condo blog writers regarding Boston condominiums and residential real estate markets. John's insights and observations about the Boston condo market have been seen in a wide variety of the most established local & national media outlets including; Banker and Tradesman, Boston Magazine The Boston Globe, The Boston Herald and NewsWeek and Fortune magazine, among others.



HISTORY

For over 24 years, John Ford, of Ford Realty Inc., has been actively involved in the real estate industry. He started his career in commercial real estate with a national firm Spaulding & Slye and quickly realized that he had a passion for residential properties. In 1999, John entered the residential real estate market, and in 2000 John Started his own firm Ford Realty Inc. As a broker, his clients have come to love his fun, vivacious, and friendly attitude. He prides himself on bringing honesty and integrity to the entire home buying and selling process. In addition to helping buyers and sellers, he also works with rental clients. Whether you’re looking to purchase a new Boston condo or rent an apartment, you’ll quickly learn why John has a 97% closing rate.

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John Ford and his staff can be reached at 617-595-3712 or 617-720-5454. Please feel free to stop by John's Boston Beacon Hill office located at 137 Charles Street.




John Ford
Ford Realty Inc
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