Today, we are reporting that mortgage brokers gave subprime borrowers overpriced home loans, even as they provided competitive rates to people with stronger credit.
For brokered loans made between 2004 and 2006, we estimate that typical subprime borrowers will pay $5,222 more in interest over four years than if they had gotten the same loan directly from a lender.
These results have serious implications for the estimated five million subprime borrowers who received loans from brokers in this period.
They also highlight issues that Congress and financial regulators are facing as they work to curb the practices responsible for the current foreclosure crisis.
We believe that our results are driven by two factors.
First, brokers are more willing to aggressively push a higher price when dealing with subprime borrowers that they perceive to be less knowledgeable and confident.
Second, subprime lenders pay more to mortgage brokers who charge above market rates. Specifically, if a broker can convince a borrower to accept a loan with a higher rate, the lender will pay the broker a bonus payment called a yield spread premium. These payments exist in the prime market too, but the incentives are different and the resulting payments are smaller.
To reach these results, we analyzed 1.7 million loans. By matching loans on the very dimensions lenders use to price risk (including credit score, home equity and more), we are able to reliably measure differences in interest charges on comparable loans.
To better protect borrowers, we make three policy recommendations:
First, remove the financial incentives for brokers to over-charge subprime borrowers by banning yield spread premiums and associated prepayment penalties on subprime loans.
Second, since every brokered loan is made in the name of a lender, lenders should be required to share responsibility for the loan.
Third, policymakers should impose specific affirmative duties on brokers requiring them to serve their clients' interests.
We also offer a set of recommendations for consumers which can be found in our report, or on our website along with more consumer resources at responsiblelending.org.
In closing, I would like to thank Assembly Member Lieu and Pam Kennebrew for joining us on this call. They are both busy responding to the subprime crisis and we are fortunate to have their perspectives.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.