Virtually all the analysis of predatory lending in the home loan market has been based on a dual-market paradigm. Sub-prime borrowers, usually less-sophisticated, lower-income, and disproportionately minority, are preyed upon. Other borrowers are not preyed upon, or if they are, it doesn't matter. The dual-market paradigm has conditioned the remedies proposed for predatory lending. Since sub-prime borrowers can't take care of themselves in the marketplace, government needs to help them by curtailing contractual options, setting price limits, mandating counseling, and the like. These "remedies" impose heavy costs on the system and remove options from the borrowers they are supposed to help. This paper presents a single-market paradigm of market failure. It argues that market failure is pervasive, and presents some new data that support this view. The core reason for market failure is that effective shopping for a mortgage is extraordinarily difficult for even sophisticated borrowers. The effective remedy is to make mortgage shopping unnecessary. Eliminating the causes of market failure would eliminate predatory lending. Mortgage shopping is a highly-skilled professional service that should be purchasable in the market. I call the professionals providing this service "Upfront Mortgage Brokers" (UMBs), to distinguish them from conventional mortgage brokers who contribute to the problem. UMBs act as agents of the borrower in shopping for a mortgage, are paid a negotiated fee for their services, and disclose and pass through the prices they receive from lenders. In contrast, conventional mortgage brokers are independent contractors who mark up the prices they receive from lenders, which they do not disclose. The global remedy to predatory lending is to require by law that all mortgage brokers operate as UMBs. Then borrowers would shop for mortgage brokers, not for mortgages, and need concern themselves only with price, quality and referrals -- the same factors they look at when hiring a house painter or an electrician. Predatory lending would then disappear. A voluntary association of UMBs, initiated by the writer, already exists. These UMBs are listed on my web site (www.mtgprofessor.com), through which they receive clients. While they comprise a tiny segment of the market, that segment works as competitive markets should. These brokers pass through the competitive wholesale prices they receive from lenders, while borrowers shop the brokers based on price and reputation.
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