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Study Suggests Subprime Borrowers Fare Worse With Brokers

CRL report recommends elimination of YSPs

April 9, 2008

By MortgageDaily.com staff

Mortgage brokers blasted a study that claimed subprime borrowers wind up paying more than $5,000 in additional costs if they use a broker. But the report also found that borrowers with excellent credit get a better deal by using a broker.

The study was announced Tuesday by the Center for Responsible Lending.

The Washington, D.C.-based consumer group said that during the first four years of a loan, a typical subprime borrower who uses a mortgage broker pays $5,222 more than if he or she obtained the loan directly from a lender. The added cost increases to $36,000 if the borrower keeps the loan for 30 years.

The additional costs, which were based on a $166,000 loan, were the result of yield spread premiums earned by brokers.

CRL said it analyzed 1.7 million loans originated between 2004 and 2006 and compared pairs of brokered and retail-originated loans for customers with similar credit-risk profiles.

"'Yield spread premiums' give brokers a strong financial incentive to steer borrowers into overpriced products," the group stated. "We must rid the market of perverse incentives that practically guarantee overcharges."

CRL recommended that YSPs be abolished on subprime loans. It also called for lenders to take responsibility for brokered loans and for a set of standards to be established that requires brokers to serve the best interests of borrowers.

But mortgage brokers shot back.

"The study was released by an organization that has been notorious in over simplifying very complex issues and appointing blame before they fully understand the facts," George Hanzimanolis, president of the National Association of Mortgage Brokers, said in a statement. "While we continue to review the document, we are greatly concerned by its misrepresentations of the broker compensation structure, the competitive nature of the mortgage business and the over simplification of this complex industry."

He questioned the methodology used in the study and suggested that the researchers used conjecture.

Hanzimanolis also noted that the report contradicts an October 2007 study from the Government Accounting Office that suggested relaxed underwriting standards, increased use of low- and no-documentation programs and higher loan-to-values were responsible for rising defaults and foreclosures. He explained brokers do not establish guidelines or approve loans.

"We believe it is a disservice to the public to assign blame for the subprime crisis on mortgage brokers when we know of so many systemic problems which Congress itself has identified," Hanzimanolis stated.

But CRL's report also found that borrowers with better credit get about the same deal at either a lender or a broker, and borrowers with "very high" credit scores actually get a better deal with a broker.

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