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Study Shows Loan Brokers' Better Side

By Kenneth R. Harney
Saturday, April 16, 2005; Page F01

For years, mortgage brokers, who originate more than half of home loans, have been targets of criticism from federal agencies and consumer advocates.

Federal agencies have accused them of failing to properly disclose fees to home buyers. Consumer groups have claimed that they steer minority and elderly borrowers into needlessly high-cost mortgages.

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But now a new, independent academic study has concluded the opposite: According to a team of researchers headed by Georgetown University's Gregory Elliehausen, home mortgage applicants with less-than-perfect credit pay lower financing costs when they obtain their mortgages through brokers rather than from loan officers directly employed by lenders. The same pattern holds true for African American, Hispanic and low-income borrowers.

Elliehausen presented his findings to a Federal Reserve Board conference here last week. His team examined computer case files on more than 500,000 "subprime" first mortgages from 10 of the largest lenders in the field and studied more than 590,000 second mortgages from the same lenders. For the time covered by the study, Elliehausen said, the more than 1 million loans in the analysis accounted for more than 40 percent of the entire subprime marketplace, which is made up of loans offered to buyers with imperfect credit.

The results of the statistical analysis: On average, total costs on broker-originated first mortgages were 1.13 percentage points lower than loans originated by employees of the lenders, and 1.98 percentage points lower on second mortgages.

Elliehausen, a senior scholar at Georgetown University's Credit Research Center, acknowledged that the size of the gaps might raise eyebrows. He emphasized that the findings were limited to the subprime sector of the market. However, subprime lenders frequently offer wide variations of rates and fees to applicants with similar credit and debt-ratio profiles. Brokers, who typically have loan origination agreements with dozens of lenders, "may be able to shop from a larger set of loans than a single [lender], and find a better match between borrower risk and annual percentage rate," Elliehausen said. "Brokers also may be better able than consumers shopping on their own to match borrower risk and annual percentage rate."

In separate analyses for loans made in predominantly African American areas, brokers' costs to applicants were about 1 percentage point below lender-employed loan officers on first mortgages, and 1.9 percentage points lower on second mortgages. In Latino areas, the savings through brokers were even greater -- 2 percentage points on first mortgages and 2.4 percentage points on seconds.

Mortgage bankers, who often purchase loans closed by brokers and originate them on a retail basis themselves through commissioned employees, reacted cautiously to the new research. Steven F. Skolnik, executive vice president for First Franklin Financial Corp., a major subprime mortgage company based in San Jose said he had not yet seen the Elliehausen study and could not comment on it specifically.

However, Skolnik said, First Franklin loan customers generally pay "about the same" in terms of annual percentage rates whether their loans are broker-originated or made through the company's retail, consumer-direct channel. At least in First Franklin's case, in other words, the one-point-plus cost savings Elliehausen's research attributed to brokers does not appear to be accurate.

Skolnik added, though, that the data overall could reflect that "brokers in general operate in a much lower-cost structure" compared with banks and retail mortgage companies that carry heavy overhead and employee costs. Moreover, he said, "brokers are far more agile and nimble than retail" lenders, when pushed to compete on pricing and terms.

Donald Henig, president of wholesale and direct-to-consumer operations for a unit of American Home Mortgage Investment Corp., a large real estate investment trust that funds home loans, said he "would not be surprised" if brokers frequently deliver lower costs to consumers.

Henig, a former president of the National Association of Mortgage Brokers before he joined his current firm, said the home loan market "is a very competitive place, and today's consumers are very well informed," thanks to widely available information on the Internet, and heavy TV, radio and direct-mail advertising by lenders.

"If a broker is going to survive," said Henig, he "has got to be competitive on pricing with retail lenders and has to provide superior service to Realtors and consumers." Brokers may not always deliver the very best price that an aggressive shopper could find on a given day, he added, "but most brokers will offer a very competitive" total financing package.

What's the message for mortgage applicants from the Georgetown study? Shop the market exhaustively -- on the Web, by phone and by customer recommendations. Don't assume that a mortgage broker necessarily will get you the best rate or lowest points. But then again, don't fail to include brokers in your comparison shopping.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

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