30 May Mortgage Brokers Cost You More Money
Mortgage brokers tend to charge more to place a loan than you would have to pay if you went directly to the lender, according to a recent HUD Study. This is not a surprise to consumer advocates but it tends to contradict the story told by mortgage brokers and their lobbyists. There’s a shocker!
The study by the Department of Housing & Urban Development’s former chief economist, Susan Woodward, looked at 7,560 FHA-insured traditional 30-year fixed-rate loans placed during May and June, 2001. The study compared the closing costs incurred by consumers who went directly to a lender and those who went through a mortgage broker. It found that the average fees for the loan through a broker were $4,000, while they were only $3,150 when the loan went directly through the lender.
Many brokered loans include a “yield spread premium” (YSP) which is an extra amount paid back to the broker from the lender in return for selling you the loan — more specifically for selling you a higher interest rate loan than you otherwise qualified for. It’s a polite term for a kickback. Mortgage brokers have claimed periodically that the YSP is a consumer benefit because borrowers could pay less upfront in their fees by paying a higher rate over the long-haul. The study seems to indicate that this is poppycock, out of every $100 in higher interest costs consumers appeared to have received only a $7 reduction in upfront fees. There’s a deal: Give me $100 and I’ll give you back $7. Go look at your last mortgage closing statement — if it includes a YSP, call your broker and ask him for the other $93 back! (Don’t hold your breath waiting for the check.)
The same thing happened to folks who paid “discount points” upfront — that is paid more upfront in costs — to “buy” a lower interest rate. They paid more but did not see a comparable savings in the rate they got. A vice president from the Mortgage Bankers Association told the Wall Street Journal that the study is based on “stale” data and they have other studies that show such deals benefit consumers.
I don’t doubt that the MBA can find or hire out some studies to say whatever they want. The Woodward study was, however, done for the government agency most responsible for overseeing this marketplace and which has no particular bias — except that it’s risking taxpayer money on these loans. And what is most telling about this study is that it takes the most plain vanilla loan possible — a 30-year fixed residential mortgage — guaranteed by the federal government and subject to FHA guidelines that limit just how much brokers and lenders can charge, and it still found that consumers lost on the brokered deals.
The news should not be shocking. A middle-man still has to put food on the table. The lender does not have to pay a salary for someone doing this job so there’s a benefit. The problem is that the benefit is on the lender’s side of the equation — they’re essentially saying, “If you come to us, we’ll give you a better deal. But if you go through those brokers who advertise all over TV and radio, well you’ll pay the full freight for doing it that way.”
The study also indicated that typically the lowest cost deals go to zip codes with the higher education levels — which bears out what many consumer advocates believe, that brokers do in fact take advantage of those who are less able to understand the transaction. And the lowest cost direct loans from lenders came through deposit-based institutions, like banks, savings and loans, or credit unions. The next cheapest loan originators were large mortgage banks followed by the smaller mortgage banks. In other words, your local bank is still the best place to get the cheapest mortgage.
Edit: This entry was picked up by the Carnival of Financial Learning #2, view the Carnival here.
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