I recently heard of a Harvard University housing study which stated that one of the biggest reasons for the current US housing market meltdown is the predatory practices of many mortgage brokers around the country.
In short, the study claims that mortgage brokers which originate 45% of all mortgages and 71% of sub-prime loans have routinely steered borrowers (with deceptive practices!) towards high risk loans, because they generate much higher commissions for themselves when selling these higher risk loans.
The study claims that millions of borrowers who were eligible for normal loans were sold sub-prime loans in order for mortgage brokers to collect these hefty commissions. And of course the lender stood to make greater profits also.
Now millions of people are defaulting on these loans and millions of houses are going into foreclosure causing the housing market to collapse!
Another wonderful example of unchecked capitalism at work! Thank you mortgage brokers!! And by the way, these predatory practices are all completely legal, as we all know it is "buyer beware" even in regards to this most complicated purchase!
Below is a pretty comprehensive article regarding this matter from California Progress Report.com
Broker Abuses and Perverse Incentives
Mortgage brokers are individuals or firms who find customers for lenders and assist with the loan process. Brokers are independent contractors – they provide a way for mortgage lenders to increase their business without incurring the expense involved with employing sales staff directly. Brokers also play a key role in today’s mortgage market: According to the Mortgage Bankers Association, mortgage brokers now originate 45 percent of all mortgages, and 71 percent of subprime loans.[MBA Research Data Notes, “Residential Mortgage Origination Channels,” September 2006.]
Brokers often determine whether subprime borrowers receive a fair and helpful loan, or whether they end up with a product that is unsuitable and unaffordable. Unfortunately, given the way the current market operates, widespread abuses by mortgage brokers are inevitable.
Buying or refinancing a home is the biggest investment that most families ever make, and particularly in the subprime market, this transaction is often decisive in determining a family’s future financial security. The broker has specialized market knowledge that the borrower lacks and relies on. While brokers in California have a common-law fiduciary duty to borrowers, the subprime mortgage market, as it is structured today, gives brokers strong financial incentives to sell excessively expensive loans to borrowers.
Experts on mortgage financing have long raised concerns about problems inherent in a market dominated by broker originations. For example, the chairman of the Federal Reserve Board, Ben S. Bernanke, recently noted that placing significant pricing discretion of mortgage loans in the hands of financially-motivated mortgage brokers can be a prescription for trouble, as it can lead to behavior that violates fair lending laws.[Remarks by Federal Reserve Board Chairman Ben S. Bernanke at the Opportunity Finance Network’s Annual Conference, Washington, D.C. (November 1, 2006).]
A report issued by Harvard University’s Joint Center for Housing Studies concurred: “Having no long term interest in the performance of the loan, a broker’s incentive is to close the loan while charging the highest combination of fees and mortgage interest rates the market will bear.”[Joint Center for Housing Studies, “Credit, Capital and Communities: The Implications of the Changing Mortgage Banking Industry for Community-Based Organizations,” Harvard University, p.4-5. Moreover, broker-originated loans “are also more likely to default than loans originated through a retail channel, even after controlling for credit and ability-to-pay factors.” Id. at 42 (citing Alexander 2003).]
In summary: Mortgage brokers, who are responsible for originating over 70 percent of loans in the subprime market, have strong incentives to make abusive loans that harm consumers, and no one is stopping them. In recent years, brokers have flooded the subprime market with unaffordable mortgages, and they have priced these mortgages at their own discretion. Given the way brokers operate today, the odds of successful homeownership are stacked against families who get loans in the subprime market.
