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In April, the New York Times published an article entitled “When to Use a Mortgage Broker”.   And despite the fact that I wouldn’t generally call myself a huge fan of the Gray Lady, and despite that the articles makes sometimes (frequently?) unflattering suggestions about the industry in which I have worked for the last several decades, I urge everyone to read it.  Why?  Because it absolutely underscores the need for transparency in mortgage lending.

Here’s the truth:  for years many mortgage brokers took advantage of uninformed and anxious-to-buy homebuyers.  Some built a career (albeit relatively short-lived) on encouraging folks who could not realistically afford to own a home to buy one anyway.  And they manipulated yield spread premiums—originally created to benefit the consumer—to line their own pockets

Now on the first count, there is some shared guilt.  To coin a phrase from one of my favorite movies, there are some brokers out there that could sell ketchup Popsicles to women in white gloves.  But let’s be honest–most people should be able to realize that if they only make $30,000 a year, paying for a $250,000 house is way out of their reach.   But what’s done is done, so let’s look at the next problem: the yield spread premium.

Let’s roll back the hands of time a bit, to when interest rates were hovering around 7 percent.  And let’s suppose you were looking for a $200,000 mortgage to purchase your own little slice of the American dream.   A friend of a friend of a friend recommended that you go see their cousin Earl, a mortgage broker who could “make things happen”.  So you sat down with Earl over an overpriced latte and man, did he cut you a deal!  You could get a 7 percent interest rate without paying a single cent in discount points OR—get this–you could you get a 6.75% for just half a discount point—only $1,000.  And, he says, you’ll save over 15 times that over the course of your loan.  Well Earl, where do I sign?

Here’s what Earl didn’t tell you.  The big mortgage banks that he worked with gave him a pricing sheet that morning that told him that he could offer 6.75% on a $200,000 loan without the borrower—meaning you—having to pay one single cent.  In fact, if you were to choose that rate, you could actually get a full point BACK.  $2,000 right in your pocket.

So when good ol’ Earl closed your loan, he not only made, say, a 1 percent origination fee ($2,000), he also got that $1,000 he charged you in discount fees AND $2,000 back from the lender.   That’s right—three grand goes in to his pocket in addition to the origination fee

And here’s where it really hurts.  If you were to have taken that same $3,000, you could have had a mortgage with a 6% interest rate.  And that, my friend, would have saved you $45,000 over the life of your loan.

So I get why the NYT suggests that people be cautious in working with mortgage brokers—in fact, I wholeheartedly agree with them.  And it’s why I absolutely believe that there needs to be transparency in mortgage lending across the board.  Give people all of the information they need, and they’ll usually make the right decision for themselves and their families.