Read the fine print
A mortgage application
TEXT OF INTERVIEW
Tess Vigeland: So we may not know the future at this point and what it holds in terms of recession, but we can look back at the past and see one of the major factors that led to these fears: the housing bubble.
Ahh, remember those heady days? Now we call it the subprime mortgage crisis. While there's plenty of blame to go around, mortgage brokers have been getting a big portion of it.
Elizabeth Warren is a professor of law at Harvard University and recently penned an editorial in the Boston Globe critical of mortgage brokers.
Vigeland: Elizabeth, what's the broker's job?
Elizabeth Warren: Mortgage brokers advertise themselves as one-stop shopping and the mortgage broker will compare dozens of lenders and give you, the customer, the best deal.
Vigeland: Sounds like the way to go.
Warren: Well, what the mortgage broker sometimes fails to disclose, however, is that the broker gets a fee and the first part of the fee is for filling out the paperwork and helping the customer find his way or her way to the mortgage company. But there's a second part that is sometimes added to the fee and that is an additional part called a yield spread premium, which is paid by the mortgage company back to the broker if the broker sells the customer on a more expensive version of the mortgage.
Vigeland: You have gone so far as to call this a bribe.
Warren: Well, I don't know what else to call it. There are a lot who are inside the mortgage industry who understand that mortgage brokers may sometimes be terrific people who help customers but may also be acting on their own behalf and the big trick in the marketplace is you can't tell which one you've got.
Vigeland: But doesn't that show up in your final documents when you go to sign your papers for the house?
Warren: Oh sure, it's somewhere in that three inches of documentation, but the part that is never disclosed is it's disclosed as a fee but nobody ever explains what the fee was for.
Vigeland: Is there a way for you to know if this is happening to you?
Warren: It's almost impossible to sort out in advance what the mortgage broker is doing. Part of the real difficulty is in the structure of how the mortgage market works right now. It's expensive to nail down your mortgage quote and the reality is, in order to guarantee you're getting the lowest price, you've got to go to multiple mortgage brokers, multiple banks, and to do that, it costs a lot of money.
Vigeland: Well brokers would likely argue that they should get paid and that's what the yield spread is there for: to pay them.
Warren: Brokers should absolutely be paid for acting on your behalf. What they should not be able to do is to get paid by the mortgage company for selling you a more expensive mortgage than the one you qualified for.
Vigeland: Elizabeth Warren teaches law at Harvard and is the author of "The Two-Income Trap." Thanks so much for your time.
Warren: Thank you for having me here.