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InsiderOnline Blog: February 2008

Limiting Competition Is Not a Solution to Bad Lending

The National Association of Mortgage Brokers says that the way to prevent future problems in subprime lending is to tighten licensing requirements. Of course they would say that. Tougher licensing requirements limits the supply of brokers, shielding those already in the industry from competition.

How does that help borrowers? It doesn’t. Suzanne Hoppough reports for Forbes:

A National Bureau of Economic Research paper in December by Kleiner and Richard Todd of the Federal Reserve Bank of Minneapolis showed that there is no relationship between tough education requirements for mortgage brokers and better outcomes for borrowers. But financial hurdles (a requirement for bonding or a minimum net worth for brokerage firms) appear to have an impact. The result, the economists found, is fewer brokers, fewer subprime mortgages, higher foreclosure rates and more high-interest-rate mortgages.

Occupational licensure, reports Hoppough, has surpassed unions “as the main vehicle for workers seeking to shield themselves from competition.”

As the economy has switched from manufacturing to services, some 28% of U.S. workers—or 43 million people—now belong to a licensed profession, according to a Princeton University/Gallup survey last year. That’s up from 4.5% 50 years ago. Over the same period union membership has fallen from 35% to 12%.

Posted on 02/13/08 02:42 PM by Alex Adrianson

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