Are Changes to Broker Fees Good For Consumers or Not
We are starting to see the ripples of change come from the mortgage crisis. (See the blog on Mortgage Meltdown). One of the changes is that mortgage lenders are changing how they compensate brokers for the loans the broker originates. Since brokers have been a party to nearly 7 out of 10 mortgage transactions, any impact to brokers is likely to trickle down to the consumers getting loans. The question up for debate is how will these changes impact consumers who are trying to get mortgages.
Some quick background in case you are unfamiliar with the roles of lenders and brokers. Mortgage brokers act as independent sales agents in the transaction. They sell lender’s loan products and use funds from the lender or a line of credit from a mortgage banker in order to fund the loan. The broker is paid a commission for their role in the transaction. The commission the broker earns is based on (1) fees paid by the borrower including points and junk fees, (2) the rate the broker charges the borrower (in some cases the rate is higher than market rates and the broker earns a yield spread premium commission), and (3) pre-paid penalties (if any) often earn additional commissions. Typically people with lower credit scores, or who have had bankruptcy and/or foreclosures (those classified as subprime) will payer higher points, higher rates, and be subject to pre-payment penalties – a trifecta for brokers looking to maximize their commissions.
New mortgage broker requirements have been adopted by a number of lenders in response to the subprime crisis. Companies such as Wells Fargo & Co. and Provident Funding Associates LP both mandating that brokers disclose upfront how much borrowers will pay in fees as well as the yield-spread premium to be paid by the lender. Additionally, Countrywide Financial Corp. lowered its maximum broker compensation to 4 percent of the mortgage amount, down one percentage point.
How will these changes impact consumers? The disclosure requirements should make the fees charged clearer to the borrowers, especially fees, like yield spread premiums, that were difficult for borrowers to identify. The lower cap on fees paid may bring mixed results to borrowers. On the one hand there, it reduces the maximum fees a borrower will have to paid to obtain a loan making the loan more affordable. On the other hand it reduces the brokers incentive to help borrowers in smaller loans. Since many of these loans are the result of consumers identified using data sets for direct marketing campaigns, brokers may raise their minimum loan requirements on these data sets meaning many of these consumers will have to proactively seek out loans on their own rather than get offers via phone and mail. It could also increase the brokers sales attempts to raise the loan amount by selling the borrowers on paying off more debt and taking out more cash than they need to in order for the broker to make an acceptable commission.
We are already seeing a drop in the percent of loans created by brokers – down now to approximately 40% of all mortgage closed. Less broker loans could mean less competition which, as the theory goes, could mean higher fees to consumers. Only time will tell if these changes are moving things in the right direction for consumers or not.
Tags: Add new tag, broker fees, broker rates, loan products, market rates, mortgage banker, mortgage crisis, origination
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