New research from a well-known consumer advocacy group, released earlier this week, claims that subprime borrowers with brokered loans end up paying significantly more than their counterparts who deal directly with lenders. The study is the latest blow to the brokered mortgage model, which industry critics have argued help fuel questionable lending practices now threatening millions of homeowners. According to a study conduction by the Center for Responsible Lending, in the first four years of a mortgage, a typical subprime borrower who has gone through a broker pays $5,222 more than if he or she obtained the loan directly from a lender. “These findings confirm that mortgage brokers steer many of the most vulnerable borrowers to higher-priced loans than they deserve,” said CRL president Michael Calhoun. “At a time when one out of five families with a subprime loan is losing their home, we must rid the market of perverse incentives that practically guarantee overcharges.” The research — the group claims it is the first to empirically examine the effect of broker compensation on a broad spectrum of borrowers — reveals what it calls “troubling patterns.” Over the 30-year span of a loan, the cost difference between a loan obtained via a broker and a retail-originated loan grows to almost $36,000, the group alleges. The report also argues that for borrowers with better credit, the difference in loan prices is less pronounced — and that borrowers with very high credit scores may actually fare better by going the third-party route. The CRL said that yield spread premium, which it characterized as “kickbacks from lenders,” gave brokers an incentive to steer borrowers into overpriced products. The report is an interesting one for industry participants, many of whom are accustomed to a knee jerk reaction against CRL studies. In this case, industry managers interviewed by Housing Wire expressed a different tone. “I can’t believe I’m going to agree with the CRL,” said one source, who asked not to be named, “but I think most of us on the origination side wouldn’t be surprised by what their study is finding — even if agreeing with the CRL makes me sort of sick to my stomach.” For more information, visit http://www.responsiblelending.org.
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