Consumer Confusion in the Mortgage Market
Susan E. Woodward
Sand Hill Econometrics
July 14, 2003
Today, roughly 60 percent of home loans are done through mortgage
brokers, who negotiate their fees one-on-one with borrowers. Brokers
have the advantage of experience and skill, plus information about
wholesale terms that are unavailable to the borrowers. Borrowers can
pay cash for all settlement services, including the broker’s fee, or they
can, in exchange for a higher interest rate on the loan, have the lender
cover some or all of these costs. For borrowers who choose to roll all
settlement costs into the rate, the informational advantage of the broker
is less severe because borrowers can shop on the basis of rate alone.
Indeed, the lowest broker fees are associated with the easiest
transactions for borrowers to evaluate—those where fees are all rolled
into the interest rate. Among the 2,700 loans analyzed here, with
average broker fees of $2,425, the fees on all-in loans are $900 lower
than those on other loans. Broker fees are also profoundly related to
borrower education, and borrowers with a bachelor’s degree pay their
brokers $1,500 less than those without, other things equal.
This is a draft. Please do not quote without permission.
ACKNOWLEDGEMENTS: I am ever grateful to Doug McManus, Marsha
Courchane, and Peter Zorn of Freddie Mac who first called my attention
to the relationship between broker compensation and the ratio of the YSP
to broker compensation. The importance of this to understanding the
variation in broker fees and related RESPA issues is central. Thanks also
to Harold Bunce for a careful reading.
I study mortgage broker compensation and other settlement costs, as
well as the mortgage interest rates paid by borrowers, in a sample of
2700 loans, funded through one national lender but written by
thousands of mortgage brokers. I calculate total fees to brokers as cash
from the borrower plu