Paying more for the loan
Subprime borrowers pay about $5,200 more in the first four years for broker-originated mortgages than loans direct from the lender, said the center. "Near-prime" borrowers pay a $1,300 premium. Prime borrowers, on the other hand, see a small savings. The center said it based its conclusions on an analysis of 1.7 million mortgages issued between 2004 and 2006.
From the report, which you can read HERE:
People with weaker credit scores naturally pay more for mortgages than people with strong scores. However, it is very difficult for borrowers with weaker credit or less experience in financial matters to know precisely how much more is appropriate, especially since, unlike prime rates, subprime rates are not generally publicly available. In addition, subprime loans tend to be much more complex than the fixed-rate mortgages that have long dominated the prime market, making their costs more difficult for borrowers to compare.
Accordingly, we hypothesize that brokers have been able to take advantage of this situation by emphasizing maximum revenues per loan for subprime borrowers. While retail lenders are probably not immune from these dynamics, we believe the effects on the costs of retail loans are less pronounced due to more regulation, better internal controls, and concerns about reputational risk.
UPDATE: Late Tuesday evening, the National Association of Mortgage Brokers issued a press release decrying the study.
The trade group's president, George Hanzimanolis, said in a statement that "we are greatly concerned by its misrepresentations of the broker compensation structure, the competitive nature of the mortgage business, and the over simplification of this complex industry. The researchers’ use of conjecture regarding broker behavior is ill-founded and unsupported, and raises questions about the methodology they employed to arrive at their conclusions."