Sure, mortgage lenders have borne the brunt of the criticism over the subprime mortgage mess that is at the heart of the current housing crisis.
Experts have pointed to the predatory tactics employed by many lenders, as well as risky practices such as saddling borrowers with confusing and costly variable-rate loans, as cause for reform in the industry.
However, less has been made of mortgage brokers, and what, if any, distinction can be made between their practices and those of direct lenders. In a new study titled "Steered Wrong: Brokers, Borrowers and Subprime Loans", the Center for Responsible Lending studies just this topic, comparing the loans originating from mortgage brokers versus lenders and how the costs associated with each may have contributed to loan default and foreclosure for subprime borrowers.
The CRL studied more than 1.7 million mortgage loans from 2004 to 2006, comparing the pricing of loans originating from brokers with "matched pairs" of loans from lenders, those with similar risks and parameters. Their pressing question: do borrowers have the same experience with brokers as they do with direct lenders?
Their answer depends on how good your credit score is. Borrowers with good credit scores tend to find the two sources to be comparable in terms of cost, with the highest credit scores actually getting a better price from a broker than directly from a lender.
But borrowers with shaky credit histories, such as a poor credit score or a recent bankruptcy filing (known as subprime borrowers), don't fare so well. In fact, subprime loans originating from brokers cost on average a lot more than loans directly from lenders. Over the price of a $166,000 mortgage loan, the CRL research shows that a borrower will pay on average $1,000 more in just the first year if the loan originates from a broker than if the same loan originates from a lender.
And the discrepancy proved to be even more pronounced the longer the life of the loan. After four years, subprime borrowers could expect to pay $5,222 in brokered loans, and over the entire life of a 30-year loan, almost $36,000. That's enough to build a nice addition to the house, and it all goes to the broker!
The percentage points that brokers earn on loans for their services, known as "yield spread premiums," offer every incentive for brokers to push subprime borrowers toward higher-priced loans or even outright lie about unfavorable terms. The research in "Steered Wrong" backs up this claim.