Education, race, sex affect mortgage brokers fee

(07-20) 04:00 PST Washington — Who gets charged higher fees by mortgage brokers when they apply for a home loan or refinancing? Who gets charged less?

A new statistical analysis of broker fees concludes that borrowers without college degrees pay on average $1,472 more than applicants with bachelor’s degrees. All other factors held equal, African Americans pay an average $500 more than whites, and Hispanics $275 more, according to the study.

Applicants with imperfect credit histories pay $1,500 more on average to their brokers, on top of higher interest rates. Borrowers who live in metropolitan areas with high household incomes are charged an average $500 more than those in areas with lower household incomes.

But borrowers whose brokers are female pay less than those whose brokers are male, according to the study. Female brokers charged their customers an average $572 less than their male colleagues.

The previously unreported study was conducted by Susan Woodward, a former chief economist for both the Securities and Exchange Commission and the Department of Housing and Urban Development. Woodward is president of a San Francisco consulting firm, Sand Hill Econometrics. She recently served as an expert witness in a home mortgage case in U.S. district court (Glover vs. Standard Federal Bank), where the court gave her access to a unique set of data — 2,700 complete mortgage application and closing files where several hundred independent mortgage brokers originated home loans that were immediately purchased by a single, national wholesale mortgage banker.

Brokers, who originate an estimated 60 percent-plus of all home loans, do not lend money directly themselves. Instead they are middlemen who handle the transactional details from application through closing on behalf of a lender who actually funds the mortgages. Brokers typically charge fees to the loan applicants, and often receive fees from the lenders as well. Broker fees to the loan applicant are negotiable, and according to the study, are highly variable.

What was unusual about the data made available by the court to Woodward was that it contained essentially all the key details on multiple sides of the mortgage transactions — personal information about the borrowers, the mortgage brokers fees charged to the borrower and fees paid by the lender, and the complete closing documents including listings of all expenses.

The 2,700 loan samples, chosen by the court according to random time periods, covered all regions of the country and comprised a slice of the lender’s mortgage business “that is highly representative nationally,” according to Woodward. With the applicant information, broker fee data and the lender’s electronic document files in hand, Woodward was able to run statistical regression analyses to determine what borrower characteristics appeared to correlate with higher and lower broker fees and closing costs. (The full study is posted at

Among her key findings:

— Borrowers of all types — no matter what their education levels or other characteristics they brought to the table — paid lower broker fees and lower total closing costs when the broker rolled all charges into the mortgage rate. Sometimes known as zero-point transactions, these mortgages typically carry a one-quarter or one-half a percentage point higher interest rate than standard- rate loans available from the lender. The average savings using this method was $1,500.

— Borrowers who rolled at least the broker’s fee and some of the closing costs into the note rate paid about $900 less in total fees than borrowers who did not.

— “Borrowers benefit from education. Those with a bachelor’s degree on average pay $1,500 less in broker fees than borrowers with only a high school education, other things equal, such as home value and metropolitan area income. ”

In an interview, Woodward said she suspects that educational level frequently correlates with borrower sophistication in financial matters. Less sophisticated applicants are at a greater “informational disadvantage” vis-a- vis the broker, said Woodward, and are more vulnerable to being charged higher fees.

Woodward added that although she was not surprised that the perceived sophistication level of the applicant affects broker fees, she was shocked at the sheer size of the differential.

— “The race of the borrower matters,” even “after accounting for education and other characteristics.” The $500 average higher broker fee to African Americans and $275 to Hispanics is not inconsistent with previous lending industry studies, said Woodward, including auto financing.

Why do female mortgage brokers charge their clients roughly $600 lower fees on average? Woodward said she has no hard evidence, but “it appears to arise from the female brokers’ lower inclination to exploit clueless borrowers.”

Asked for comment on the Woodward study, the National Association of Mortgage Brokers had none immediately, but a spokeswoman said a team is reviewing the research and would issue a response soon.


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