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Report: Brokered B&C Loans More Costly
By PAUL JACKSON
Published: April 9, 2008

New research from a well-known consumer advocacy group, released earlier this week, claims that subprime borrowers with brokered loans end up paying significantly more than their counterparts who deal directly with lenders. The study is the latest blow to the brokered mortgage model, which industry critics have argued help fuel questionable lending practices now threatening millions of homeowners.

According to a study conduction by the Center for Responsible Lending, 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 obtained 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 group claims it is the first to empirically examine the effect of broker compensation on a broad spectrum of borrowers — reveals what it calls “troubling patterns.”

Over the 30-year span of a loan, the cost difference between a loan obtained via a broker and a retail-originated loan grows to almost $36,000, the group alleges. The report also argues that for borrowers with better credit, the difference in loan prices is less pronounced — and that borrowers with very high credit scores may actually fare better by going the third-party route.

The CRL said that yield spread premium, which it characterized as “kickbacks from lenders,” gave brokers an incentive to steer borrowers into overpriced products.

The report is an interesting one for industry participants, many of whom are accustomed to a knee jerk reaction against CRL studies. In this case, industry managers interviewed by Housing Wire expressed a different tone.

“I can’t believe I’m going to agree with the CRL,” said one source, who asked not to be named, “but I think most of us on the origination side wouldn’t be surprised by what their study is finding — even if agreeing with the CRL makes me sort of sick to my stomach.”

For more information, visit http://www.responsiblelending.org.

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The author of the study, Keith Ernst, Senior Policy Counsel, CRL , says in his statement attached to the release of the report that “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.”

http://shrunklink.com/aosb

I’m making no judgment yet on the rest of the report since I haven’t read it, but the last sentence in that paragraph is incorrect. Yield spread payments to mortgage brokers available on subprime loans have been seriously limited for the last 10 years in comparison to yield spread payments available on conventional or FHA loans. Any damaged credit potential subprime borrower that could be squeezed into a conventional or FHA loan would get a lower rate and still be much more profitable to the mortgage broker. If extra yield spread premium was the brokers’ only motive, the incentive was to give the borrower the better loan.

The author’s conclusions about higher costs for borrowers may indeed be correct, but the proposed solution incorrect since this basic assumption of the author is wrong. The mortgage industry is clearly in the middle of a train wreck, but the CRL has a certain agenda and it seems they are trying to fit the results of this report into it rather than actually find a solution.

Perhaps another one of their backers is ready to short sale some more mortgage stocks?

http://shrunklink.com/anxu

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Originally posted by scottanthony

Cpruitt,

Uh...they're probably right. When I was on here a lot 3 yrs ago, everyone and their mother was selling subprime loans to borrowers who qualified for FHA and even conventional fnma loans because they were 1)not FHA approved and FHA wasn't ~sexy~, 2)didn't fully understand DU/LP quals, and 3)selling subprime was so easy because everyone was approved.

Only when subprime dried up did everyone start doing FHA.

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Originally posted by rtrefflich

Sub Prime was there as mentioned to help borrowers who could not get loans otherwise. Here in So Cal, FHA was out of the question because when prices began rising FHA loan limits did not and very few people could take advantage of the programs. Sub Prime was the only place where they could get it done. Sub prime will be back, with tighter LTV guidelines but it will be there once again when the govt. decides that the house should only be worth so much and the market says it is worth more.

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Originally posted by cpruitt

My problem with the author's comment is that he is trying to get yield spread banned because he says that was the reason borrowers were directed toward subprime.

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Originally posted by RANDY P

exactly - loan limits, and the fact that simply put, everyone believed at the time that housing prices would continue going up - that wasn't my suggestion, but the entire industry, the borrowers, friends of the borrowers, HGTV, David Lerah, NAR on and on.

The pricing on 2/28's and whatnot was legitimately better than was was available with FHA with discounted MI, flex 100, 75/25 whatever you can dream up.

What sense would it be to put a borrower into a 30/fixed at a higher rate / payment if you and the borrower honestly believed that the pricing was going up and in 2 years the equity would be there to go 30/fixed? If you had tried that at that time you would've lost the loan. It would be bad info on the industry's part, but the borrowers all believed it on their own - "buy now while it's affordable!!" was the motto in 2004-2005.

Not our line, but the borrower's line.

rjp

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Originally posted by cpruitt

My problem with the author's comment is that he is trying to get yield spread banned because he says that was the reason borrowers were directed toward subprime.

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