Last week guest poster Russell Martin explained the different options for obtaining a mortgage. One conclusion that you can draw from his explanation is that mortgage brokers and direct lenders offer the consumer a lot more choices and flexibility than mortgage banks. However, the question I always ask is: since mortgage brokers and direct lenders end up being middlemen don’t they add costs to the system? And won’t the borrower end up paying a higher interest rate by using them?
In order to answer this question Russ directed me to an old blog post of his that explains the economics of the mortgage business in terms of gas stations. It’s a great, entertaining read. Just keep in mind that it was written before BP made a mess of the gulf.
In addition, Russ has previously pointed out to me that the mortgage brokers and direct lenders basically provide an outsourced function and, as with many outsourced functions, they can do it cheaper than the company that is using them could do it. In other words, when the mortgage banks buy loans from one of these middlemen they are paying them less for the services they provide than it would cost them to perform these services in-house. So there is no premium paid for using the services of a broker or direct lender.