Too much data can confuse mortgage negotiations

Nation's Housing

March 07, 2004|By KENNETH HARNEY

TO MAKE an intelligent choice in shopping for your next mortgage, how much do you really need to know?

The Federal Trade Commission has completed groundbreaking behavioral research on home mortgage customers with a conclusion that might shock consumer advocates: More disclosure isn't always the answer. Sometimes giving people more information can confuse them and push them into higher-cost loans.

The FTC's research focused on fees paid to mortgage brokers by lenders for delivering mortgages with higher-than-standard rates. Brokers, who originate an estimated two-thirds of home loans, typically sell those loans to wholesale lenders. They frequently charge consumers a direct fee for their services. They might also receive additional money from lenders when they deliver mortgages carrying rates higher than the lender's "par," the standard interest rate for that day and type of mortgage.

A loan with a rate a quarter of a percentage point higher than par might generate a cash payment of 1 percent of the loan amount from the lender to the broker, $1,000 on a $100,000 mortgage. A loan with a rate three-quarters of a point higher than par might generate a payment of 2 1/2 percent of the loan amount, $2,500 on a $100,000 mortgage.

These fees are called "yield-spread premiums." They have been controversial in recent years for several reasons. First, some brokers have pushed borrowers into needlessly higher-rate mortgages and have pocketed substantial sums behind their customers' backs.

Second, though many brokers disclose their fees, consumer advocates argue that those disclosures don't really tell borrowers what's going on. Listing a yield-spread premium of $3,000 on a settlement sheet with the cryptic description "p.o.c." (paid outside closing) does not alert borrowers that they are paying a higher interest rate than the lender's lowest.

Finally, loan officers for banks and other mortgage lenders are never required to disclose their compensation, though it can render their loans costlier than those available from independent brokers.

Another factor is the popular "zero-fee," or limited-fee loan deals, all involving yield-spread premiums and higher-rate loans. You might, for example, agree to pay a quarter of a percentage point higher interest rate on your new mortgage, while the broker pays all or some of your settlement costs with the yield-spread premium payment made by the lenders. That's a win-win solution if you don't want to spend your own cash at the closing.

Enter the FTC. To determine whether formal, legally required disclosure of broker yield-spread fees - but not bank loan officer fees - helps or hinders consumers, the agency devised an innovative empirical test involving a national sample of recent mortgage customers and current shoppers. The sample was weighted to cover a broad range of income, educational, ethnic and geographic backgrounds.

The objective was to see whether consumers could correctly identify the lowest-cost mortgage deals with and without broker fee disclosures up front. Some broker loans were lined up directly for comparison with identical loans offered by bank loan officers. Everything was the same - the mortgage amount, the rate, the itemized closing costs - except that the bank loan officer's compensation was not disclosed, while the broker's compensation was.

Next the consumers were asked to pick between a broker-originated loan that carried total costs $300 less than those for an otherwise identical mortgage from a bank loan officer. As in the earlier comparison, the only difference was that the broker's compensation was disclosed and the bank loan officer's wasn't. In both cases, many consumers picked the bank loan, apparently because it "looked" less costly without a fee disclosure such as the broker's.

The FTC found that disclosure of the broker's compensation - without parallel compensation disclosure from lenders - "creates a substantial bias against" broker loans, even when they are the less costly alternative. The size of the bias - pushing consumers into higher-cost lender loans - ranged from 12.6 percent to 25.2 percent of consumers in the experiment.

Is that a big deal? The FTC thinks so. Even if the higher amount paid per loan is just the $300 used in the study, the FTC estimates that "the total impact would be $400 million to $800 million in additional costs paid by consumers each year."

Compensation disclosures alone don't help consumers, especially when they're not the same for everybody in the game. When you shop, talk to brokers about their fees, and check out direct lenders, online or by phone. Compare rates against rates, loan fees against loan fees, guaranteed fixed fees against nonguaranteed fees. Then go with the lowest-cost, guaranteed-fee provider.

Ken Harney's e-mail address is kharney@winstarmail.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.