Mortgage Broker Practices Spotlighted By Subprime Crisis

The subprime mortgage crisis has ignited scrutiny of the people who broker home loans, with some critics arguing that hidden fees and other practices have caused a surge in delinquencies.

The main problem is that, counter to common perception, a mortgage broker does not represent the borrower who pays them for advice.

Instead, a mortgage broker is more like an independent salesperson who is often paid as much by the mortgage lender offering loans as the borrowers.

A controversial fee called a Yield Spread Premium, paid by the home loan lender to the broker, has come under intense criticism and is the subject of a class-action lawsuit against NovaStar Financial, one of the nation’s largest subprime [bad credit mortgage] originators.

The case is set to go to trial in May.

Subprime mortgages are typically sold to home buyers with lower credit scores and ratings. This corner of the mortgage loan business has been hit hard as borrowing costs climbed and the housing market cooled.

In January, more than 14 percent of subprime [bad credit mortgage loans] were at least 60 days delinquent, almost double the rate a year earlier, according to real estate data specialist First American Loan Performance.

As the market boomed, mortgage brokers’ influence grew as they became more and more involved in arranging the majority of home loans. Now the broking business should bare some of the blame for the ensuing crisis, say critics, including some who are brokers themselves.

“We all have some culpability,” said Steve Heideman, a mortgage broker who heads an organization dedicated to improving disclosure in the business. “The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan.”

There’s a basic problem with mortgage brokers being paid by home loan lenders as well as borrowers and “very few” people know this happens.

“It’s a dirty little secret of this business,” he said. “It shows a lack of confidence on the part of a mortgage broker to not tell the client what they’re making on the back side.”

Official industry associations also admit to some shortcomings. There are “isolated instances” in which mortgage brokers actually steer borrowers to the lender that pays the highest fees to the broker, the California Association of Mortgage Brokers, which represents more than 4,000 brokers and other service providers, says on its Web site.

But these associations are against expanded regulations and argue that it’s up to consumers in the end to decide which home mortgage is best for them.

“Mortgage brokers do not represent every home loan product available in the marketplace, nor do we have the ‘best’ mortgage available,” said Harry Dinham, president of the National Association of Mortgage Brokers.

“As the decision-maker, the role of the consumer is to acquire the financial acumen necessary and take advantage of the competitive marketplace, shop compare, ask questions and expect answers.”

Some say the problem of mortgage brokers being paid by both borrowers and home loan lenders makes them indistinguishable from salespeople hired by banks to sell home loans. That means borrowers may want to beware when hiring a mortgage broker to help them get a mortgage.

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