Excessive broker fees arise primarily from a lack of transparency in broker pricing. Most broker fees are paid by the lender as a rebate or "yield spread premium" (YSP). For example, the wholesale lender who quotes a rate of 6 percent at zero points might pay a YSP of 1.6 points for a 6.375 percent mortgage. The borrower pays the higher interest rate but no cash out of pocket, and is either not aware of the YSP or becomes aware of it too late to do anything about it.
Dealing with this problem by applying a suitability standard to broker fees means making judgments about whether the fee in any particular case is too high. I find this idea morally repugnant: as long as society is not passing judgment on lawyer's fees or doctor's fees, it has no business passing judgment on mortgage broker fees.
Yet a very high mortgage broker fee differs in an important way from, say, a very high lawyer fee. The lawyer's client always agrees to the fee, whereas, unless the broker is a UMB, the broker's client usually doesn't.
The appropriate solution is not fee-setting but transparency. If borrowers know what the broker will make on their transaction, they will prevent overcharges far better than any suitability-based system for controlling fees.
One way to provide transparency is to require all brokers to operate as UMBs. Another workable remedy is to require that YSPs be credited to borrowers, who would have to agree to sign them over to the broker.
Whatever rule is adopted should apply to any transaction on which the loan provider receives YSPs from a wholesale lender. The legal status of the loan provider should not matter. It thus would cover the so-called correspondent lenders who operate just like brokers, and compete with them, except that they close loans in their own names.
Loan officer overages are an amount above the prices posted by a lender to its loan officers. The posted price is the acceptable price; the overage is gravy. For example, the lender posts a price of 6 percent and one point but the loan officer gets the borrower to agree to pay two points. The additional point is the overage.
Overages should be made illegal. Lenders should remain free to charge what they want, but their loan officers should not be free to take advantage of ignorance and naiveté to charge some borrowers more than others just because they can.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
Copyright 2007 Jack Guttentag
