Mortgage Brokers Overcharged Clients
April 9, 2008

A study just released examining the subprime loan crisis blames mortgage brokers for overcharging borrowers with poor credit.

More often than not, brokers placed borrowers with weak credit in loans with significantly higher interest rates than lender-originated mortgages, according to the study released Tuesday by the nonprofit, nonpartisan Center for Responsible Lending.

By tacking on additional percentage points to subprime borrowers' loans, mortgage brokers got rewarded in bonuses from lenders called "yield-spread premiums" that often totaled several thousand dollars and added thousands of dollars in payments to the borrower during the life of the loan, the study found.

The report's findings came as no surprise to Dawn Marie Bates-Buchanan, managing attorney of Gulfcoast Legal Services in Bradenton, many of whose clients fell victim to adjustable-rate mortgages that have been the trademark of the subprime crisis.

"Generally, we find clients who probably weren't eligible for loans to begin with or had very weak credit or poor asset-to-debt ratios," Bates-Buchanan said. "They (brokers) put them in high-interest rate loans and they were going to get money back and be able to refinance (later). When the closing actually came, the closing costs were usually $5,000 to $6,000 more than what they had been quoted or expected."

Often, borrowers are unaware of the yield-spread premium on the closing documents, Bates-Buchanan said.

"The yield-spread premium should never have existed," Bates-Buchanan. "It's just a way to hide the actual closing cost. That's just a way to hide what you're paying the broker."

Peter Minarich, a mortgage banker and broker with CTX Mortgage Co. in Bradenton, agrees that many mortgage brokers probably didn't explain financing arrangements enough to their clients.

But they are not solely to blame for the subprime crisis, he said.

"You can put the blame on everybody if you want to blame somebody," Minarich said. "Mr. Buyer signed the document, Mr. Broker gave it to him. Maybe Mr. Broker didn't explain it to him, but Mr. Buyer signed it. It's a triple-edged sword here. The product was available and people took advantage of it."

In retrospect, many borrowers who obtained adjustable-rate mortgages probably could have gotten government-backed, fixed-rate loans, Minarich added.

"The sad thing about it is, a lot of these people that were put in the subprime loans, probably a third of these people probably could have gotten an FHA with a fixed-rate that wasn't so volatile," Minarich said. "But if the loan was available and the investors were out there buying them on Wall Street, then of course they're going to make the loans."

The study from the Durham, N.C.-based Center for Responsible Lending study cites Harvard research from 2007 that found that most borrowers lack the ability to adequately assess financing risk and comparison shop to get the best deal on mortgages.

A typical subprime borrower would wind up paying $5,222 more during the first four years of a $166,000 mortgage compared to a borrower who received a loan directly from a lender, the study found.

The study suggested banning yield-spread premiums, creating a system of accountability for lenders and investors and the establishment of clear duties for brokers to their clients.

It also recommended that consumers get multiple quotes, including from banks and credit unions, before committing to a home loan and ask pointed questions about interest rates, fees and how high payments can go during the term of the loan.

The study can be read in its entirety at www.responsible

Report finds additional points added to mortgage loans, adding thousands of dollars

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