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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
not the outcome he and other investment bankers had expected. “None of us wrote
and said, ‘Oh, by the way, you have to be responsible for your actions,’” Ranieri said.
“It was pretty self-evident.”
The starting point for many mortgages was a mortgage broker. These independ-
ent brokers, with access to a variety of lenders, worked with borrowers to complete
the application process. Using brokers allowed more rapid expansion, with no need
to build branches; lowered costs, with no need for full-time salespeople; and ex-
tended geographic reach.
For brokers, compensation generally came as up-front fees—from the borrower,
from the lender, or both—so the loan’s performance mattered little. These fees were
often paid without the borrower’s knowledge. Indeed, many borrowers mistakenly be-
lieved the mortgage brokers acted in borrowers’ best interest. One common fee paid
by the lender to the broker was the “yield spread premium”: on higher-interest loans,
the lending bank would pay the broker a higher premium, giving the incentive to sign
the borrower to the highest possible rate. “If the broker decides he’s going to try and
make more money on the loan, then he’s going to raise the rate,” said Jay Jeffries, a for-
mer sales manager for Fremont Investment & Loan, to the Commission. “We’ve got a
higher rate loan, we’re paying the broker for that yield spread premium.”
In theory, borrowers are the first defense against abusive lending. By shopping
around, they should realize, for example, if a broker is trying to sell them a higher-
priced loan or to place them in a subprime loan when they would qualify for a less-
expensive prime loan. But many borrowers do not understand the most basic aspects
of their mortgage. A study by two Federal Reserve economists estimated at least
of borrowers with adjustable-rate mortgages did not understand how much their in-
terest rates could reset at one time, and more than half underestimated how high
their rates could reach over the years. The same lack of awareness extended to other
terms of the loan—for example, the level of documentation provided to the lender.
“Most borrowers didn’t even realize that they were getting a no-doc loan,” said
Michael Calhoun, president of the Center for Responsible Lending. “They’d come in
with their W- and end up with a no-doc loan simply because the broker was getting
paid more and the lender was getting paid more and there was extra yield left over for
Wall Street because the loan carried a higher interest rate.”
And borrowers with less access to credit are particularly ill equipped to challenge
the more experienced person across the desk. “While many [consumers] believe they
are pretty good at dealing with day-to-day financial matters, in actuality they engage
in financial behaviors that generate expenses and fees: overdrawing checking ac-
counts, making late credit card payments, or exceeding limits on credit card charges,”
Annamaria Lusardi, a professor of economics at Dartmouth College, told the FCIC.
“Comparing terms of financial contracts and shopping around before making finan-
cial decisions are not at all common among the population.”
Recall our case study securitization deal discussed earlier—in which New Cen-
tury sold , mortgages to Citigroup, which then sold them to the securitization
trust, which then bundled them into tranches for sale to investors. Out of those
, mortgages, brokers originated , on behalf of New Century. For each, the
