This morning I was reading the Wall Street Journal and there was an interesting article entitled “Deal Fees Under Fire Amid Mortgage Crisis”. The article addresses the fact that in many cases mortgage brokers have little to no incentive to say no to a borrower because the broker’s primary motivation is to collect their commission. In other words, the broker is interested in closing the deal, regardless of the long term outcome for the lender and the borrower.
While this is a well established practice, we should be able to come up with a better incentive based system. Commercial lenders could offer brokers a commission for brokering the deal and then a “bonus” for a loan that is not in default in five years time. This would provide broker’s with an incentive to get borrowers a loan that they can sustain for several years. This will also help commercial lenders avoid the current lending crisis that was created, in large part, due to aggressive loan brokering.