The Housing Chronicles Blog: Not a surprise: report finds mortgage brokers charge more than direct lenders

Friday, May 30, 2008

Not a surprise: report finds mortgage brokers charge more than direct lenders

I have to admit that I'm not a big fan of mortgage brokers: although they claim to work with numerous lenders to get you the best deal, most smart people with decent credit and a willingness to document their income and assets (imagine that crazy idea!) could find good deals on their own.

So how do I know this? Because when I was too busy to do so for myself, I've used mortgage brokers twice in the last few years, and now I know that (a) I paid needless fees and points (I shouldn't have paid any points at all); and (b) I'm paying higher rates on the notes (generally just 1/4 point, but that can add up over a long period of time). The lowest-rate mortgage I ever got was through a direct lender - 5.50%, no points, 30-year fixed (I'm also not a fan of adjustable rate mortgages, having lived through that mistake in the 1990s).

And don't even get me started on the junk fees like $50 FedEx packages and "document preparation fees," as if it takes an act of Congress to key in a few numbers into a template (which, by the way, often contained numerous mistakes).

So it comes as no surprise to me to see this article in the Wall Street Journal citing a recent study by the Dept. of Housing and Urban Development (HUD) that concludes borrowers pay a lot more to get a loan from a broker than through a direct lender:

The home-mortgage industry takes advantage of consumers' confusion to charge some people much higher fees than others, according to a study prepared for the Department of Housing and Urban Development.

The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders...

Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates.

For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.

Borrowers who paid "discount points" to lower their interest rates typically didn't benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose "no-cost" loans -- in which all fees are built into the interest rate -- typically paid the lowest effective fees.

Here's the defense from the mortgage brokers association:

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on "stale" seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.

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