Steered Wrong: Brokers, Borrowers, and Subprime Loans
Published: April 8, 2008
In recent years, a majority of subprime loans made in the United States have been originated by mortgage brokers, who can properly be characterized as the "engine" of the subprime market. The rapid growth of subprime lending was fueled by thousands of mortgage brokers across the country delivering billions of dollars of subprime loans to mortgage lenders, who in turn packaged and sold them to Wall Street investors.
Because of their major role, mortgage brokers have had significant influence in which loans were originated, who received them, and at what price. Ideally, mortgage brokers present their clients with available financing options and help them choose the most suitable loan. But the dismal performance of subprime mortgages has put brokers and their actual practices under increased scrutiny.
In this report, we analzyed broker pricing patterns by comparing the cost of loans provided by mortgage brokers to those provided by retail lenders, such as banks, credit unions, and mortgage bankers. We analyzed more than 1.7 million mortgages originated between 2004 and 2006 and compared "matched pairs" of loans with similar risks to contrast the experience of borrowers who received loans from brokers and retail lenders.
We found significant differences between broker and lender pricing on home loans, primarily on mortgages originated for families with weaker credit histories: From the first year of the loan, borrowers with credit profiles in the subprime range pay substantially more for brokered loans than they would have if they had obtained their loan directly from a lender. In the first year alone, a typical subprime borrower pays over $1,000 more; this cost gap grows to over $5,000 after four-years, and almost $36,000 over a 30-year life of the loan.