Predatory Mortgage Brokers
April 10, 2009
I have no first-hand experience with mortgages and absolutely no expertise in the matter. But I keep coming across things like this, an editorial from today’s NY Times:
“According to a 2008 analysis by the Center for Responsible Lending, subprime borrowers who went through brokers actually fared worse than those who went directly to lenders. Borrowers who used brokers coughed up additional interest payments ranging from $17,000 to $43,000 for every $100,000 they borrowed.
Lenders were, of course, complicit, happily issuing high-priced loans to people with little or no hope of repaying them. But it was often the brokers who steered borrowers away from affordable loans and toward the high-priced loans in the first place.
The most clearly unethical form of payment is the so-called yield-spread premium. Brokers can claim this premium by steering a borrower whose credit history qualifies him or her for say, a 7 percent loan, into a more expensive loan at a higher rate. Predatory? Yes. And perfectly acceptable under existing lending laws. A House bill introduced by Representative Barney Frank, a Democrat of Massachusetts, would rightly make yield-spread premiums illegal.”
A couple of thoughts on this. First, so much for the unregulated free market. Once again we see an unregulated market with perverse incentives, leading to inefficient (and unethical) outcomes and collusion. Obviously the most efficient market outcome here would be for consumers to get the lowest rate lenders were willing to give them. The whole point of the mortgage broker is to facilitate this – they lower the transaction costs involved when a consumer looks for the lowest rate by providing that service. Too many times we see collusion in these circumstances, whether it’s brokers colluding with lenders to give out higher loans or analysts colluding with corporations to give out bum stock tips (or journalists colluding with those they’re supposed to be keeping accountable). If the unregulated market is not yielding efficient outcomes, and those outcomes are likely to improve with proper regulation, why, again, is it wrong to regulate them?
Second, I’m sick and tired of hearing that the fault for these transactions always lies with the consumer. Besides the fact that these people are getting robbed (they are being told by brokers they’re getting the best deal possible when, of course, they’re not), and the fact that there are enormous informational asymmetries (the broker and lender understand all the intricacies of how the provisions of these loans entail barriers to refinancing and the imposition of penalties, while the consumer, having hired a broker to provide this information, is left in the dark), since when do we blame consumers in cases of unfair business practices? If I’m sold a lemon, or I’m the victim of false advertising, or if provisions are slipped into a contract somewhere in bad faith and in a place I’d never discover them, am I the party at fault? If producers and retailers collude to inflate prices and bar competition from the marketplace (which is EXACTLY what’s going on in this case), am I the party at fault? Simple answer: no.