To gain perspective on institutional practices, nothing beats seeing how the practices differ somewhere else. Recently I looked at how mortgage brokers and the lenders they deal with operate in the UK. I have had invaluable help from Richard Hobson, a broker in the UK for many years who is now a broker in the US. The basic economics of the industry are essentially the same on both sides of the Atlantic. Assuming that the lender is satisfied that the broker is properly licensed or certified, the arrangement between them is very simple. In effect, the lender says to the broker “Here are my prices and eligibility requirements, you bring me an eligible customer and I’ll make the loan.” Lenders find it advantageous to work through brokers because it gives them nationwide distribution capacity without branches or loan officer employees. Even a single-office lender can offer loans wherever there are brokers with whom it can do business. Lending through brokers is flexible; the lender who wants to cut its loan volume simply prices a little higher so the loans stop coming. It isn’t necessary to fire anyone or close offices. On the broker side, mortgage brokerage is an attractive occupation for energetic self-starters who like to be their own bosses and reap the full rewards of their own efforts. They must be capable of meeting the legal requirements, which are generally low in the US, and higher in the UK as discussed below. If the opportunities are provided by lenders, there is never a shortage of brokers.

Yet mortgage brokerage practices in the UK evolved differently than in the US. Perhaps the most important difference is that the pricing of broker services is much more transparent in the UK. This greater transparency is closely related to differences in the way that lenders price mortgages. The prices quoted by lenders in the UK are the retail prices available to borrowers through brokers. These prices are viewed as public information, and some lenders advertise them in various media and\or on their websites. An eligible borrower who seeks out such a price knows that he can obtain that price from any broker dealing with that lender. In the US, in contrast, lenders deliver wholesale prices, and only to the brokers with which they deal. Brokers then add their markups before quoting retail prices to borrowers. Lenders never publicly disclose their wholesale prices. With the exception of Upfront Mortgage Brokers, brokers don’t disclose them either, since that would be tantamount to disclosing their markups, which brokers view as nobody’s business but theirs.