January 22, 2001
"Every
Monday the Philadelphia Inquirer runs ads by 30-odd mortgage lenders and
brokers showing loan type, interest rate, points, APR, down payment and
lock period.
The Inquirer receives its mortgage price information from
Mortgage Market Information Services (MMIS), which claims to service over
300 newspapers. How
reliable is this information?"
Not very.
If you want access to price information from a large number of
lenders, you do better with one of the mortgage referral sites on the
internet. These have
limitations as well, but they are not as serious.
I compared
the MMIS information appearing in the Inquirer of January 1, 2001with the
information on two mortgage referral sites: interest.com (IC), which is
MMIS�own site, and compareinterestrates.com (CIR).
Timeliness
of information: The
Inquirer for Monday shows prices as of Thursday or Friday of the previous
week. The staleness
grows during the week until the following Monday.
In contrast, most lenders on IC and CIR post their prices every
day, with the posting date shown for each lender.
Price
quotes and loan size: Price
quotations always apply to loans in some size range.
Loan amounts are shown on IC and CIR but not in the newspaper.
Other
factors affecting prices: The
price quotations in the press and on the web sites assume you have good
credit; are a citizen or permanent resident alien; have sufficient income
and assets to meet the lender�s requirements; can document your income
and assets; are purchasing a single-family detached house as your primary
residence; and will not have a second mortgage on the house when the loan
closes. If you don�t meet
all of these requirements, prices are higher.
These
assumptions are not shown in the newspaper or the web sites.
Points:
Points are an upfront charge expressed as a percent of the loan.
One point is 1% of the loan. Some
lenders charge an origination fee, also expressed as a percent of the
loan, which makes them points in disguise.
Origination
fees are shown separately by IC and included in points on CIR.
Both approaches work. The
newspaper, however, ignores origination fees, warning the user about it in
a footnote. This reminds me
of the football lineman who misses his block and yells �look out� to
his quarterback.
APR:
The APR is a comprehensive measure of credit cost to the borrower
that reflects the interest rate, points, and most other lender charges.
In addition, if price quotations specify a down payment less than
20%, the APR is supposed to include mortgage insurance.
Lenders are
careful in calculating APRs in connection with mortgage applications,
because they can be sued if they do it wrong.
When it comes to providing APRs to information service providers,
however, they are much more casual. I
have found numerous mistakes, all in the same direction (too low), both in
the newspaper and on the referral sites.
MMIS shows
down payments both in the newspaper and on IC but does not include
mortgage insurance in the APR. Yet
a footnote in the newspaper states that the APRs �must� include
mortgage insurance! Confusion
city. CIR avoids this
confusion by not showing the down payment.
Junk
fees: Most lenders charge
fees expressed in dollars, which vary all over the lot.
In a survey I did several years ago, junk fees charged by different
lenders ranged from zero to $7500! Price
comparisons that don�t take account of junk fees can go seriously
astray.
IC and CIR
show junk fees for each lender. The
newspaper does not report junk fees.
Information
on adjustable rate mortgages (ARMs): ARM
shoppers need to know more than the initial interest rate, which in many
cases holds for a year, and in some cases for only a month.
They should also know the interest rate index which is used to
adjust the rate after the initial rate period ends; the margin that is
added to the index to determine the rate; and rate caps, which limit rate
changes.
These are
all shown by CIR. But the
newspaper and IC show only the initial rate and how long it lasts.
Information
on prepayment penalties: Neither
the newspaper nor the web sites indicate whether or not loans carry
prepayment penalties.
Some of
these problems in the newspaper ads could be fixed easily and some can�t.
Newspapers will never be able to compete with the net in timeliness
or in the depth of information provided.
They would do better to restrict hard copy ads to general
information, and refer readers to their own web sites for timely and
detailed price information.
Copyright
Jack Guttentag 2002
