Do you pay less for a home mortgage when you apply through a mortgage broker, or is it cheaper to apply direct to a lender? The answer -- at least as it applies to home buyers with less-than-perfect credit -- may surprise you.

The first-ever independent national study of mortgage broker pricing versus direct retail lender pricing found that brokers tend to be cheaper. The new statistical study, conducted by a research team headed by Georgetown University economist Gregory Elliehausen, examined a massive sample of one-million plus subprime first and second mortgages from the portfolios of 10 major lenders. The researchers focused on annual percentage rates (APRs) -- the base interest rate plus lender or broker fees -- on loans originated by lender-employed loan officers and independent brokers who originate and sell their mortgages to the same lenders.

Broker-originated loans were 1.13 percentage points less costly than lender originated first mortgages, according to the statistical analysis. On second mortgages, the gap was even larger -- broker loans were 1.97 percentage points cheaper.

The study found similar patterns of differences between brokered mortgages and lender-originated loans in neighborhoods where 75 percent or more of the population is either African-American or Hispanic. Broker-originated first mortgages were one percentage point cheaper in African-American neighborhoods and second mortgages were 1.9 points less costly. In predominantly Hispanic neighborhoods broker-originated first mortgages were 2 points less costly and 2.4 points cheaper for seconds.

Georgetown's Elliehausen, senior scholar at the university's Credit Research Center, said the study results point to the potential economies that brokers bring to the marketplace by maintaining business relationships with large numbers of different lenders, especially in the subprime credit arena.

"Borrowers who lack experience in the mortgage market may reduce the cost of learning about the availability of different mortgage products, terms, and creditors through broker counseling," said Elliehausen.

A subprime borrower or home buyer who deals solely with a single direct lender, by contrast, is exposed to only that lender's products and pricing.

Mortgage brokers are middlemen in housing finance, connecting loan applicants with lenders. They account for an estimated 60 percent-plus of all new home loans and refinancings. Brokers obtain so-called "wholesale" price quotes from lenders, then add on their own fee to produce a retail rate quote to an applicant. Brokers often are very small business enterprises in terms of staffing and overhead, and eliminate the need for some national lenders to maintain costly, bricks-and-mortar retail offices in many locations.

Steven F. Skolnik, executive vice president of First Franklin Financial Corp., one of the largest "non-prime" wholesale lenders in the country, said he is intrigued by the results of the study. He agreed that brokers as a group "operate in a lower cost structure" than retail lenders, and can cut their compensation on a given loan in a competitive situation. However, said Skolnik, loan customers at his firm pay "about the same" overall prices for mortgage money whether their loan was originated by a broker or by a retail loan officer.

Dr. Elliehausen said the million-plus sample of loans covered by the study limits the conclusions to subprime mortgages, and does not necessarily suggest that broker-originated mortgages are cheaper in the prime credit market as well.

However, given the possibility that brokers anywhere in the mortgage market have the ability to expose home buyers to a wider array of loan choices and prices than any single retail lender offers, it's probably a good idea as a mortgage shopper to include at least a few brokers on your list -- along with the usual Internet, mortgage banking and commercial bank sources.

Published: April 18, 2005

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.