Same borrower qualifications, same loan, but very different prices
New research by the Center for Responsible Lending shows that subprime borrowers with brokered loans pay significantly more than their counterparts who deal directly with lenders. In the first four years of a mortgage, a typical subprime borrower who has gone through a broker pays $5,222 more than if he or she obtains the loan directly from a lender.
"These findings confirm that mortgage brokers steer many of the most vulnerable borrowers to higher-priced loans than they deserve," said CRL president Michael Calhoun. "At a time when one out of five families with a subprime loan is losing their home, we must rid the market of perverse incentives that practically guarantee overcharges."
The research--the first to empirically examine the effect of broker compensation on a broad spectrum of borrowers--reveals troubling patterns. The most important is that, for borrowers with weak credit, brokered mortgages carry higher interest rates than the same loans obtained directly from a retail lender. On a typical loan of $166,000, a subprime borrower with a brokered mortgage will pay $5,222 more in the first four years of the loan. Over the 30-year span of a loan, the cost difference grows to almost $36,000.
The research also shows that people with better credit tend to receive comparable loan prices whether they go through a broker or directly to a retail lender. Borrowers with very high credit scores can even fare a bit better by going through a broker, usually on mortgages with fixed rates--the very type of loan that has been scarce in the subprime market.
What we conclude from the report:
- Kickbacks from lenders—known as "yield spread premiums"--give brokers a strong financial incentive to steer borrowers into overpriced products.
- A lack of transparency and the complexity of the loans in the subprime market make it all but impossible for consumers to know if they are being overcharged.
- Policymakers should (1) ban practices that give brokers an incentive to overcharge subprime borrowers, (2)ensure that lenders take responsibility for brokered loans made in their name, and (3)set standards requiring brokers to serve customers' interests.
CRL based its research on an analysis of 1.7 million mortgages made between 2004 and 2006 to borrowers representing the full credit spectrum. Researchers matched pairs of brokered and retail-originated loans for customers with similar credit-risk profiles, controlling for clear-cut factors that affect loan rates. Even after taking into account varying credit scores, varying loan types, and varying levels of debt and income verification, price disparities emerge that are consistent and significant between loans obtained through a broker and those obtained straight from a lender.
An April 8, 2008 press teleconference announced the release of this report:
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