MORTGAGE brokers for years have been targets of criticism by federal agencies and consumer advocates.
The agencies have accused brokers, who originate more than half of new-home loans, of failing to properly disclose fees. Consumer groups have charged them with steering minority and elderly borrowers into needlessly high-cost mortgages.
But now a new, independent study has concluded the opposite: A team of researchers headed by Georgetown University's Gregory Elliehausen found that home mortgage applicants with less-than-perfect credit pay lower financing costs when they obtain their mortgages through brokers instead of from loan officers employed by lenders. The pattern held true for African-American, Hispanic and low-income borrowers.
Elliehausen presented his findings to a Federal Reserve Board conference in Washington April 7. His team examined case files on more than 500,000 "subprime" first mortgages from 10 of the largest lenders in the field and studied more than 590,000 closed second mortgages from the same lenders.
For the period studied, according to Elliehausen, the 1 million-plus loans in the analysis made up more than 40 percent of the subprime marketplace. The results: Costs on broker-originated first mortgages averaged 1.13 percentage points lower than loans originated by lenders' employees, and 1.98 percentage points lower on second mortgages.
Elliehausen, a senior scholar at Georgetown's Credit Research Center, emphasized that the findings were limited to the subprime sector of the market. However, subprime lenders frequently offer wide variations of rates and fees to applicants with similar credit and debt-ratio profiles.
Brokers, who typically have loan origination agreements with dozens of lenders, "may be able to shop from a larger set of loans than a single [lender], and find a better match between borrower risk and annual percentage rate," Elliehausen said. "Brokers also may be better able than consumers shopping on their own to match borrower risk and annual percentage rate."
In separate analyses for loans made in predominantly African-American areas, brokers' costs to applicants were about 1 percentage point below lender-employed loan officers on first mortgages, and 1.9 percent lower on second mortgages. In Latino areas, the savings through brokers were greater - 2 percentage points on first mortgages and 2.4 percent on seconds.
Mortgage bankers, who often purchase loans closed by brokers and originate them on a retail basis themselves through commissioned employees, reacted cautiously to the new research. Steven Skolnik, executive vice president for First Franklin Financial Corp., a major "nonprime" mortgage company based in San Jose, Calif., said he had not seen the Elliehausen study and could not comment on it specifically.
However, Skolnik said, First Franklin loan customers generally pay "about the same" in terms of annual percentage rates whether their loans are broker-originated or made through the company's retail, consumer-direct channel. At least in First Franklin's case, in other words, the 1-point-plus cost savings Elliehausen's research attributed to brokers does not appear to be accurate.
Skolnik added, though, that the data overall could reflect the fact that "brokers in general operate in a much lower cost structure" compared with banks and retail mortgage companies that carry heavy overhead and employee costs. Moreover, he said, "brokers are far more agile and nimble than retail [lenders]" when pushed to compete on pricing and terms.
Donald Henig, president of wholesale and direct-to-consumer operations for a unit of American Home Mortgage Corp., a large real estate investment trust that funds home loans, said he "would not be surprised" if brokers frequently deliver lower costs.
Henig, a former president of the National Association of Mortgage Brokers before he joined his current firm, said "the [home loan] market is a very competitive place, and today's consumers are very well-informed," thanks to the Internet and heavy TV, radio and direct-mail advertising by lenders.
"If a broker is going to survive," Henig said, "[he or she] has got to be competitive on pricing with retail lenders and has to provide superior service to Realtors and consumers."
Brokers may not always deliver the very best price that an aggressive shopper could find on any given day, he added, "but most brokers will offer a very competitive" total financing package.
Harney's e-mail address is firstname.lastname@example.org.