Fed tries to regulate mortgage broker industry
The shadow of a house key falls over a mortgage application form.
Tess Vigeland: You work hard to be responsible for your finances. Your reward should be that you get better treatment from the banking industry than the financial laggards. But for a good chunk of the housing boom that was not the case -- at least when it came to mortgage brokers.
So as of this week, they're facing some new rules from the Federal Reserve. Marketplace's Nancy Marshall Genzer is here with the details. Hello, Nancy.
Nancy Marshall Genzer: Hey Tess.
Vigeland: I guess we should probably start by explaining what exactly a mortgage broker does.
Marshall Genzer: Yes, we should. Let's say I'm going to buy a house.
Vigeland: Oh! Very exciting.
Marshall Genzer: Very exciting. I can go to a bank or I can go to a mortgage broker. And the broker works with a number of different lenders and is supposed to sort through my options for me, sort of like a middle man. Of course, the broker gets a commission, the broker isn't doing this for free. In theory, Tess, the broker should always give me the best deal. But during the housing bubble, some brokers steered consumers to loans that gave the brokers the highest commissions and these tended to be the most expensive loans.
Vigeland: So there would be a higher interest rate, usually.
Marshall Genzer: There would be a higher interest rate, the subprime loans everybody remembers. Nick Retsinas teaches real estate at Harvard and he told me how it worked:
Nic Retsinas: There were brokers who were just selling loans like they were selling widgets. And I think this rule is a reaction to that and saying, "Hey, from this point forward, we have to find loans that have a bias toward favoring the consumer not the lender."
Marshall Genzer: But, Tess, Retsinas stressed that not all brokers did this and there are some honest brokers out there.
Vigeland: Of course, there are always bad apples that spoil the bunch. But what is this new law supposed to do keep all of them honest?
Marshall Genzer: That's the tricky question here. It would require all brokers to steer borrowers to the loans that would give the consumers the best deal. But Tess, it's not clear how this would be enforced. I mean, basically, the rule tells brokers to ignore the profit motive -- you know, just do this for free! And of course, they don't like that idea. They say they have to make a buck.
Chris Mayer says they may have a point. He teaches real estate at Columbia Business School. And Mayer says there's really no way to know if brokers are actually offering borrowers the best deal. And they can find ways around these new rules. Maybe by tweaking an expensive loan so it seems like that loan is the only one that meets a borrower's needs.
Chris Mayer: What a smart salesperson will do is change the attributes of one of those products a little bit and present them in a way to consumers that allow the consumers to choose the one that is more profitable for the broker.
Vigeland: Now Nancy, obviously the brokers are not in favor of this. And one of the arguments that I've heard is that this is going to mean that some brokers will leave the business and that it could get just plain more expensive for the consumer.
Marshall Genzer: Yeah, and actually, Nic Retsinas of Harvard made those points when I talked to him. Some brokers might quit the business because of these new rules, or decide they're just going to sell loans from one bank, just work with one bank. That would mean more concentration in the loan business, higher prices for loans. And Retsinas still likes the new rules, but he also says we may have to pay a little more for our loans because of that protection.
Vigeland: Alright, Marketplace's Nancy Marshall Genzer joining us from our Washington bureau. Thanks so much Nancy.
Marshall Genzer: You're welcome.