Consumer Confusion in the Mortgage Market

51 Pages Posted: 2 May 2012 Last revised: 3 May 2012

Date Written: July 17, 2003


Today, roughly 60 percent of home loans are done through mortgage brokers, who negotiate their fees one-on-one with borrowers. Brokers have the advantage of experience and skill, plus information about wholesale terms that are unavailable to the borrowers. Borrowers can pay cash for all settlement services, including the broker’s fee, or they can, in exchange for a higher interest rate on the loan, have the lender cover some or all of these costs. For borrowers who choose to roll all settlement costs into the rate, the informational advantage of the broker is less severe because borrowers can shop on the basis of rate alone. Indeed, the lowest broker fees are associated with the easiest transactions for borrowers to evaluate — those where fees are all rolled into the interest rate. Among the 2,700 loans analyzed here, with average broker fees of $2,425, the fees on all-in loans are $900 lower than those on other loans. Broker fees are also profoundly related to borrower education, and borrowers with a bachelor’s degree pay their brokers $1,500 less than those without, other things equal.

Keywords: mortgage broker, YSP, yield spread premium, confusion

JEL Classification: D12, G21, R21

Suggested Citation

Woodward, Susan E., Consumer Confusion in the Mortgage Market (July 17, 2003). Available at SSRN: or

Susan E. Woodward (Contact Author)

Sand Hill Econometrics ( email )

1682 Oak Avenue
Menlo Park, CA 94025
United States
650 322 7456 (Phone)

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