In my last newsletter, I outlined the Federal Reserve’s new rules pertaining to mortgage compensation reform that went into effect April 1, 2011. These new rules have caused a huge outcry that’s resonating not only with mortgage originators, but nationwide, throughout the real estate industry.
When the Fed published their final ruling with regard to these changes, they sited four studies for the basis of their action. This warrants repeating: Congress and The Federal Reserve pointed to four studies as their motivation to implement the most dramatic changes the mortgage industry has seen in decades.
However, after reading through the conclusions of these studies, I was left scratching my head to find any basis to support the Fed’s actions.
Consider the following four studies:
- The Price of Subprime Mortgages at Mortgage Brokers and Lenders, was published in November 2010. [i] In their study, they found that mortgage brokers on average save their clients 1.13% over going to the banks directly. In fact, minority borrowers saved even more by working with brokers!
- Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers, was published by the National Bureau of Economic Research in December 2007 and revised in April 2008.[ii] They found that mortgage brokering as a whole has been good for the mortgage industry. Mortgage brokers create competition and thus, save consumers money.
- Steered Wrong: Brokers, Borrowers, and Subprime Loans, was published by the Center for Responsible Lending in April 2008. They based their research on an analysis of 1.7 million mortgages made between 2004 and 2006 to borrowers representing the full credit spectrum. They found:
- For borrowers with weak credit, mortgages obtained through a broker carried higher interest rates than the same loans obtained directly from a bank.
- Borrowers with better credit tended to receive comparable loan prices whether they went through a broker or directly to a bank.
- Borrowers with high credit scores fared better by going through a mortgage broker, usually on mortgages with fixed rates – the very type of loan that was scarce in the subprime market!
- The Pricing of Mortgages by Brokers: An Agency Problem? Was published in 2009 by Michael LaCour-Little, PhD, of California State University, College of Business and Economics.He found that the incentives given to brokers are often poorly aligned with the best interests of borrowers. He said his results suggest loans originated by brokers cost borrowers about 20 basis points more, on average, than going direct to a bank and that this premium is higher for lower-income and lower credit score borrowers.
These findings are obviously troublesome. However, before we give too much credence to the legitimacy of his findings, it’s important to look at how he arrived at his findings. Although many sources were referenced, his conclusions were largely based on the following data:
- Rate sheets from numerous wholesale lenders that he was able to find online.
- The activities and originations of two mortgage brokers in Florida during the 2000 calendar year.
Let’s get this straight. Dr. Little’s findings, which he claims are representative of the entire national mortgage industry, are based on a review of some rate sheets and the activities of TWO mortgage brokers! (Want to bet these two brokers pushed sub-prime loans?) Am I the only one who sees an inherent problem with his conclusions?
After reviewing these four studies, my conclusions are the same as what I’ve known to be true all along:
Borrowers tend to do better when they work with honest, professional, competent, and knowledgeable mortgage brokers.
There were a minority of bad-apple broker houses, who employed “slick salespeople” that pushed sub-prime loans on borrowers and slammed them for maximum profits. These con-artists gave the mortgage industry a black eye. But most of these “salespeople” have left the industry and have returned to selling shoes, cars, or whatever they were doing before they decided to “give mortgages a try.” Therefore, these additional layers of regulation do nothing to punish the offenders and only stifle the industry as a whole.
Historically speaking, real estate and home sales have driven economic recoveries. For that to happen, this industry needs less government intervention, not more.
If I can follow the logic and draw these conclusions, how come the likes of Barney Frank, Christopher Dodd, Ben Bernanke, and Timothy Geithner couldn’t do the same?
Warren Goldberg is a Mortgage Planner and published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. His newsletter is read by almost two thousand subscribers.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.
[i] Written by Gregory Elliehausen, Financial Services Research Program, and Min Hwang, Dept of Finance, both of George Washington University.
[ii] Written by Morris M. Kleiner, Professor of Public Affairs and Industrial Relations at the Humphrey Institute of Public Affairs and the Industrial Relations Center at the University of Minnesota and Richard M. Todd Vice President, Community Development & Banking and Policy Studies, Federal Reserve Bank of Minneapolis.