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Unintended consequences of regulating mortgage brokers

It’s understandable why people want to increase regulation of mortgage brokers, since many of them contributed to the housing bubble and bust by acting unscrupulously. But economics teaches us to beware of unintended consequences. New research indicates that at least one form of regulation of mortgage brokers could backfire.

The regulation in question is surety bonds or net worth requirements, which are intended to keep mortgage brokers honest by assuring that they have some skin in the game—real assets that can be taken from them if they screw up. But in a National Bureau of Economic Research working paper, Morris Kleiner of the University of Minnesota and Richard Todd of the Federal Reserve Bank say this: