Lower APR’s with a Broker, Not Mortgage Lenders

Many consumers believe that if they cut the middle man out and go straight to the source, in this case the lender, they will receive a better Annual Percentage Rate. Dr Gregory Elliehausen of the Georgetown University Credit Research Center proved that this perception by consumers is in fact false. Estimates indicate that borrowers obtaining subprime mortgages through brokers paid lower annual percentage rates than borrowers obtaining subprime mortgages from lenders. These results support the hypothesis that through competition, brokers tend to pass their origination cost advantages to the consumer. Compared to lenders, brokers have been able to stay above water during volatile market conditions. This has recently been proven true with our current market.

How Much Better of a Deal Are We Talking?

The study found the APR on broker-originated first mortgages were 1.13 percentage points less than loan originated by lenders, and 1.98 percentage points lower on second mortgages. This study examined more than 500,000 “subprime” first mortgages and 590,000 second mortgages from 10 of the nation’s larges subprime lenders. J.D. Power and Associates says consumers who shop solely with mortgage brokers were more satisfied with the mortgage acquisition process than those who shopped solely with a direct lender.

Current State of the Industry

With the fear of an economic recession we are seeing all time lows set forth by the Federal Reserve. Last week the Fed’s had an emergency 75 basis point reduction, which is the first reduction that size since 1982. Chairman Ben Bernanke’s Federal Reserve offered up another half-point rate cut to investors Wednesday, amid signs of malaise in the US economy. Wednesday’s move brings the central bank's fed funds rate target to 3%, the lowest it has been since 2005. The central bank also lowered the discount rate, the interest it charges to lend directly to banks, by 50 basis points to 3.5%.

Sources:

Broderick Perkins. (2005, April 21). Realty Times: Visit Brokers and Bankers for the Best Deal [Electronic Version].

Nat Worden. (2008, January 30). TheStreet.com: Fed Reduces Rates Again.

Terry Clemans. (2008, January 25). MBSQuoteline Weekly Newsletter: Economic Report from NCRA.