CNNMoney.com has an interesting article available, Wow, I Could Have Had a Prime Mortgage. This article discusses the well-known fact that mortgage brokers make more by selling sub-prime mortgages than prime mortgages. That creates a real incentive to not offer the customer the best deal up front. In fact, according to this article somewhere up to 50% of all the prime mortgages sold in recent years were sold to borrowers who could have qualified for Prime mortgages.
In other words, a lot of the foreclosure mess we are watching didn’t need to happen. I’m not just referring to the cost of home loss, or the general loss in property values for the rest of us. This whole mess also has the potential to do some serious damage to institutional investors (like pension funds) and the whole credit market — depending on whose crystal ball you believe.
Sure, you really ought to ask before you take out a mortgage. Sure, you should pull your credit report, figure your position and call around; but the most vulnerable in our community are the least likely to do that. Oh, and just in case you were wondering, anyone buying a house really should talk to someone other than their real estate agent before taking the first loan package handed to them. (Yep, referring to a statement in the CNN article again.)
So, what I want to know is, if a mortgage lender offers a sub-prime, adjustable rate mortgage when the borrowers could qualify for much better terms; does he have a duty to mention that they might qualify for a prime mortgage? In other words, is failing to offer the best available terms fraud?
My guess is that it isn’t. Of course, my guess is also that it is going to be very dependent on state consumer credit/mortgage broker licensing regulations.
If anybody has any thoughts on this, let me know.