July 23, 2001
Ever since I
began warning consumers about tricks of the mortgage broker trade, I have
been fielding angry letters from brokers.
Some of them are fit to print, and even thoughtful.
It is time to deal with their arguments.
"Why
do you write as if brokers are the only ones who play games with
borrowers? Don�t lenders�
loan officers play the same games? Why don�t you write about them?"
I have no
reason to believe that loan officers employed by lenders are more
scrupulous than brokers. In
fact, many brokers learned their trade (and their tricks) when they worked
for lenders.
One reason I
focus on brokers is that 7 out of 10 borrowers get their loans through
brokers. But the major reason
is that I believe that brokers ought to be held to a higher standard of
service than lenders.
Lenders
provide money and service, but brokers only provide service.
Their sole reason for being is that their service is better than
that of lenders. If that is
not the case, there is no reason for brokers to exist.
Recently, I
proposed that brokers who accepted that responsibility operate explicitly
as agents of borrowers in finding mortgages.
They should establish an upfront fee for their services in writing,
and disclose and pass through wholesale prices from mortgage lenders.
I have even proposed that brokers be required by law to operate in
this way.
In contrast,
the great majority of mortgage brokers operate as independent contractors,
concealing lender prices (and the brokers� markups on those prices) as
long as possible. This way of
doing business mucks up the distinction between brokers and lenders.
It also creates a conflict between the interest of the borrower and
that of the broker. The more
the broker can induce the borrower to pay, the more the broker makes.
�Consumers
can buy groceries or appliances quite well without knowing how much the
merchant�s markup is. Why
is a mortgage any different?�
Groceries and
appliances are very easy to shop. When
consumers make mistakes, losses are small and they correct them next time
around. Most consumers don�t
need any help.
Mortgages, in
contrast, are extremely difficult to shop, even for sophisticated
consumers. The losses from
making a mistake, furthermore, are enormous.
Most borrowers want professional guidance from an expert.
Borrowers
should be able to retain experts whose financial interests are not in
conflict with their own. Eliminating
conflict means passing through the lenders� prices and setting a
separate price for the professional�s services.
As with any professional service they purchase, consumers
have a right to know the price in advance.
�It
is blatantly unfair to require brokers but not lenders to reveal their
markups. Either they both should be required to disclose, or neither
should. Don�t you believe
in a level playing field?�
Disclosure
of markups reduces the capacity to deceive borrowers.
Hence, this question can be rephrased as follows: �Shouldn�t
brokers have the same opportunities as lenders to deceive borrowers?�
No, they should not.
Lenders
sell loans, and I expect them to try and get the best price possible, like
any other seller. Brokers
sell service, and a critical part of their service should be to protect
the borrower from the lender. Brokers
have the right to charge whatever they can induce borrowers to pay for
their service. However, they
should do it in the light of day rather than conceal it in the markup.
�I
don�t have any issue with mortgage brokers who want to operate strictly
as service providers, so why do you have an issue with brokers who want to
operate as independent contractors? Why
not let them both operate and let the market decide?�
You
would have a good point if borrowers could distinguish the two so they
could make an informed choice. Under
existing circumstances, they can�t.
But I would buy into a system where states offered two kinds of
broker licenses and required brokers to identify themselves prominently as
either independent contractors or borrowers� agents.
Would you?
