Mortgage Brokers Boom While Borrowers Burn: The Hidden Cost of 'Free' Home Loan Fixers

Although lenders across the US are cautiously pulling back operations, independent brokerages continue to hold a substantial share of the mortgage market despite rising interest rates.

A mortgage broker's primary role is to assist clients in finding the most suitable mortgage deal based on their financial circumstances. They typically charge fees for their advisory services.

According to Andrew Russell, owner of RCG Mortgage, the growth of independent brokerages stems from increasing consumer recognition of the unique services brokers provide.

'Brokers are getting market share because although in theory the amount of pies are going down, they're getting more slices within those pies because finally the consumer is realizing that if they're going to buy or refinance, they should use a loan officer at a broker company,' Russell explained.

As brokers continue to expand their operations and increase revenue, homebuyers face mounting challenges related to administrative closing costs. These costs are often fixed, but can become substantial — sometimes equating to or exceeding the down payment itself. Higher home prices and rising living expenses further burden millions of Americans.

Affordability Hinges on Mortgage Shopping

With home prices near historic highs, the real measure of affordability hinges on where borrowers seek their mortgage. These closing costs can impose significant financial stress, especially on those with lower incomes. For example, the baseline costs for borrowers in the lowest income quartile averaged 11.6% of their annual income. JPMorgan's analysis indicates that shifting from banks to brokers and nonbank lenders can increase these costs even further.

Borrowers with bank-originated loans paid an average of $5,119 (£3,803) in closing costs. In contrast, those opting for broker-facilitated loans can expect their costs to be, on average, an additional $739 (£549) more than if they had used a bank. Borrowers choosing nonbank lenders face an average markup of $506 (£376), or roughly 9.9% more.

These figures highlight that the convenience of broker services comes at a notable affordability cost, especially when comparing these premiums to income levels.

Furthermore, the size of fees charged by non-depository lenders can add approximately 1.5% to closing costs for borrowers in the lowest income quartile, raising their overall burden to 13.1%, compared to 11.6% for bank-originated loans.

Broker Origination Charges Lead the Pack

While origination fees from nonbank lenders are, on average, 24.7% or $487 (£361) higher than those from banks, broker origination premiums are approximately 1.5 times larger than nonbank charges.

It is vital to recognise that closing costs are a crucial financial consideration for many households, directly affecting their ability to rebuild savings after purchasing a home. These costs also pose risks of delinquency for low-income borrowers with limited cash reserves post-closure, making them more vulnerable to unexpected expenses such as urgent home repairs or healthcare needs.

Moreover, financing closing costs through interest rates is a significant decision that can increase overall origination costs and worsen long-term affordability. The higher utilisation of lender credits within the broker segment may suggest that borrowers are relying on these credits to manage their elevated closing costs.

Even when comparing multiple loan estimates, rate-sensitive borrowers might end up choosing a higher-cost mortgage if they only shop through brokers. This highlights the importance of comparing all options carefully to avoid unnecessary extra costs.

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