We don’t need a mortgage guild

Treasury Secretary Henry Paulson Jr. has announced plans to establish stringent national licensing standards for mortgage brokers. This is not a good idea.

The relationship between licensure in various professions and the quality of service is ambiguous at best. In the specific case of mortgage brokers, a comparison of states that license mortgage brokers and those that don’t suggests that national licensure could lead to more foreclosures, not less.

Morris Kleiner of the University of Minnesota and Richard Todd, a vice president at the Federal Reserve Bank of Minneapolis, examined mortgage-broker licensing requirements in the 50 states and District of Columbia between 1996 and 2006. They found no significant relationship between licensing requirements and subsequent outcomes in the housing market, with one exception.

States that require brokers to post a large bond or to have a minimum net worth tend to have fewer mortgage brokers and fewer subprime mortgages. They also have a higher foreclosure rate on subprime mortgages, and a higher percentage of mortgages with high rates of interest.

Read it all here.

Most mortgage brokers will love this plan. This is what happens with licensure requirements: Consider that when Albert Einstein retired, he would have had to go back to school for a year or more if he wanted to become “qualified” to teach high school physics in Princeton, N.J. Lengthy licensure requirements will just deter high-quality career changers and other productive people. I am certified to teach high-school economics, although I don’t. But given the licensure requirements, N. Gregory Mankiw could not teach economics in high-school, because he is not “highly qualified” to do so (to my knowledge). So, because of the crazy licensure requirements, one of the most prominent economists in the world–and a person who teaches economics at Harvard–cannot teach economics in high school. Crazy.

This entry was posted on March 24, 2008 at 11:24 am and is filed under General post. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.