Soft Information in the Subprime Mortgage Market

Abstract

Mortgage brokers play an important role in residential subprime mortgage market. In connecting borrowers to lenders, mortgage brokers obtain borrowers’ soft information, such as the likelihood of receiving future income/wealth shock, in the process. The geographical distance between broker and borrower can represent the ease of which soft information can be acquired and utilized. Using a dataset from a large subprime lender, I document two facts: first, low-documentation loans are more likely to default when brokers are located away from properties, even after controlling for hard underwriting characteristics. Second, there is little evidence that the incremental default risk is priced. These two findings suggest that soft information is not fully-internalized. I also show that relevant soft information is more about borrower characteristics than local knowledge, which supports the view that interpersonal interaction is important for retail banking.