As a consumer, I care about a department store's prices, not its markups,
because I can easily compare prices with the store across the street.
If it were as easy to compare mortgages, I wouldn't be concerned
about the mortgage broker's markup either.
But mortgages are extremely difficult to shop, in part because there are
so many different types. For
any one type, furthermore, prices vary with a variety of factors, such as
the borrower's credit, the down payment, the type of property, the purpose
of the loan, and so on. In
addition, prices change from day to day.
Because
of these difficulties, it would be much easier for consumers to shop mortgage broker markups, leaving it for the brokers to shop for mortgages
on their behalf. But
consumers don't have that choice. Mortgage
brokers don't make an explicit charge for their services.
They make their money by placing a markup on the wholesale prices
quoted to them by lenders. The
prices they quote to consumers include their markups.
There is no way for a consumer to know whether a broker's markup is
reasonable because typically it is not disclosed until after an
application is submitted. Short
of submitting multiple applications through different brokers, which some
borrowers do, it isn't possible to shop broker fees.
Under
the existing pricing system, borrowers cannot depend on brokers to shop
for them because brokers are in a conflict situation with their customers.
The higher the price the broker can induce the customer to pay, the
more money the broker makes.
Mortgage
brokers emphasize the importance of the "human touch" in
mortgage lending. And they
are right. This pitch
would be more convincing, however, if it were not heavily contaminated by
conflict of interest. Is that
ARM the broker is encouraging me to take really the best mortgage for me,
or is it the one on which the broker can make the largest markup?
The
upshot is that borrowers who want to ensure that they receive competitive
prices must shop for loans, even though most would prefer to use an expert
to do it for them.
Mortgage brokers provide an important service, and it is growing more so
as the market becomes increasingly complex.
But they offer a service, not a product, and they should disclose
the cost upfront, as other service providers do.
Borrowers should have a clear choice between shopping lenders and shopping
mortgage brokers. If they
shop lenders, they compare loan prices.
If they shop brokers, they compare the prices charged to do their
loan shopping for them, and to provide expert and disinterested counsel.
The process should be transparent. So
long as brokers set their fees in advance, it doesn't matter whether they
charge by the hour, a fixed dollar amount, or a percentage of the loan.
They should be willing to reveal the wholesale prices quoted to
them by lenders, and pass those prices on to customers.
The rogues in the industry would be hurt by this change in pricing, but
the industry as a whole would benefit:
Establishing pricing transparency while getting rid of the rogues would
enhance public confidence and get the government off the industry's back.
Brokers
probably would increase market share at the expense of lenders.
If provided the opportunity to make a choice, the percent of
mortgage borrowers who do their own shopping likely would be no more than
the percent of home-owners who paint their own homes.
The bane of
brokers, borrowers who submit two or more applications, would be sharply
reduced, perhaps eliminated.
Ethical
mortgage brokers tired of being tarred by association with the rogues of
the industry, need not wait for government intervention.
Consider
how consumers would choose if offered the following choice:
Broker A, who fully discloses the fee, or broker B, who will reveal
the fee 3 days after the application has been submitted, provided the
consumer knows where to find it on the settlement sheet.
Copyright
Jack Guttentag 2002
