Consumer Confusion in the Mortgage Market

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Abstract
Today, roughly 60 percent of home loans are done through mortgage brokers, who negotiate their fees one-on-one with borrowers. Brokers have the advantage of experience and skill, plus information about wholesale terms that are unavailable to the borrowers. Borrowers can pay cash for all settlement services, including the broker's fee, or they can, in exchange for a higher interest rate on the loan, have the lender cover some or all of these costs. For borrowers who choose to roll all settlement costs into the rate, the informational advantage of the broker is less severe because borrowers can shop on the basis of rate alone. Indeed, the lowest broker fees are associated with the easiest transactions for borrowers to evaluate —those where fees are all rolled into the interest rate. Among the 2,700 loans analyzed here, with average broker fees of $2,4 25, the fees on all -in loans are $900 lower than those on other loans. Broker fees are also profoundly related to borrower education, and borrowers with a bachelor's degree pay their brokers $1,500 less than those without, other things equal. This is a draft. Please do not quote without permission. ACKNOWLEDGEMENTS: I am ever grateful to Doug McManus, Marsha Courchane, and Peter Zorn of Freddie Mac who first called my attention to the relationship between broker compensation and the ratio of the YSP to broker compensation. The importance of this to understanding the variation in broker fees and related RESPA issues is central. Thanks also to Harold Bunce for a careful reading.

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