Are UpFront Mortgage Brokers the Solution to Predatory Lending?
In these pages, we have often complained about the mortgage broker industry, and especially the yield spread premiums that they receive from lenders when they stick consumers with loans that are worse than they qualify for. While the subprime market is melting down, this might be just the time for reform. Professor Jack Guttentag at UPenn has proposed a solution that would align the interests of consumers and brokers.
Guttentag has created a voluntary association of brokers working under the following principles: brokers disclose their fees to consumers up front, and disclose the wholesale loan rates too. If mortgage brokers receive any rebates or bonuses from the lender, these have to be passed along to the consumer.
Beyond this voluntary league of brokers, Guttentag argues elsewhere that these practices should be legally mandated. Old-style brokers who hide the ball and receive kickbacks for bad loans will be illegal. According to Guttentag, under this regime,
[B]orrowers would shop for mortgage brokers, not for mortgages, and need concern themselves only with price, quality and referrals -- the same factors they look at when hiring a house painter or an electrician. Predatory lending would then disappear.
Free market types should be quick to ask why the voluntary association of upfront brokers won't suffice. If they really are better for consumers then we should expect that they will prevail in the market and the old-style will whither away, even without any new legislation.
What do you think? Is the consumer mortgage market transparent and robust enough to achieve this goal by itself? Or does it need a little help from the state?
I think that if you sign up for a loan, and you don't carefully review the terms(written by lawyers, for lawyers), you have exposed yourself to a financial liability, which you are encouraged to do about 15 times a day during a regular weekday TV program schedule. Collecting interest(and fees, and late charges, and annual charges, and taxes, and whatever else you can tack on, there) is a lucrative business, else people would not be doing it. Now, you can work 3 jobs, run yourself into the ground, rob Peter to pay Paul, or you can run a personal budget, and find the 'off' button on the remote, and largely reassert control over your financial life. Madison Avenue is betting that you won't...
March 20, 2007 11:45 AM | Reply | Permalink
I think you are missing the point, impeachtoday. Borrowers can't review the terms that aren't disclosed. You don't know what the wholesale loan rate or the yield spread premium is, or whether the broker is getting a rebate or a bonus. You can read through a mortgage, a note, a Truth in Lending statement or anything else you please at the closing table and you will have no more clue about those numbers than you had when you sat down. The closing documents are purely between the borrower and the lender, not the borrwer and the mortgage broker, or, better yet, the mortgage broker and the lender.
There is a required good faith estimate at the start of the mortgage transaction so that people don't faint when they finally see the numbers at closing. There is no reason why the mortgage broker shouldn't be required to tell you what his own numbers are. If everything is aboveboard and honest, there is nothing to hide. If those numbers show that the borrwer has been shoehorned into a subprime loan for the benefit of the broker, then the borrower has every right to know. After all, that money is coming out of the borrower's pocket in the end.
March 20, 2007 1:06 PM | Reply | Permalink
I disagree, I think the whole mortgage business stinks, I will never enter into such an agreement, at the end of the day I think renting is cheaper, plus you can terminate your lease and be out from under any obligations in a much shorter period of time than is required if you 'own' a house, also you're not liable for the taxes that will be assessed against the property, and if you get into the whole crafty business of second mortgages and so forth, well see above where I said it stinks. From FreddieFannie on down, real estate itself is largely a racket, and you WILL pay your property taxes or wish that you had. Personally, I think some of the lending practices related to property are downright criminal, but as they've proved lucrative in a lot of areas where they've been permitted in terms of increased tax revenue, it's all been politely ignored for a pretty long time, now. Result? Lots of people facing foreclosures, out of their money, out of their homes, not a pretty picture. Again, renting is a better way to go.
March 21, 2007 6:14 PM | Reply | Permalink
I am a mortgage boker in California. Upfront disclosure is already the law here for brokers licensed by the Department of Real Estate, who comprise the majority of brokers in the state.
We have to disclose any rebates and all other compensation within three days of application, then again at closing. This requirement has been in effect for over a decade, and has had remarkably little effect on predatory lending.
My take is most of the people who fall victim to these kinds of loans are not the people who read things closely, so additional disclosures in and of themselves will do little to help, and may actually hurt. We already have pages and pages of disclosures that clients need to sign, adding one more just makes it easier to bury important facts in mounds of paperwork.
Tom O
March 26, 2007 9:22 AM | Reply | Permalink