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October 8, 2002, revised
March 7, 2003
"I am anxious about getting a mortgagebecause everybody wants to make money from me. How do I know who I can
trust?"
In the home loan market, that is a critically
important question.
In most markets, one party to a transaction
usually has more information than the other. The information disparity in the
home loan market, however, is unusually large. Most borrowers are in the market
only a few times in their life. They have limited time to learn the rudiments,
never mind the many nuances, of an extremely complex transaction. In contrast,
the professionals on the other side of the table know the nuances because they
deal with them every day.
With that kind of imbalance, trust is
critically important. Without it, borrowers may bounce from one loan provider to
another, wasting everybody�s time. Or they may stick with one but drive him
crazy with questions, demands and suspicions that make the process unpleasant
for everybody.
Most mortgage shoppers deal with this problem
by following referrals. Then the question is, How good are the referrals? Here
are some comments on the major referral sources.
Real Estate Sales Agents: Home
purchasers accept more referrals from real estate sales agents than from all
other sources combined. The homebuyer often establishes a relationship with the
agent during the house-hunting phase, and the agent is there when the need for a
mortgage arises.
Sales agents have the same interest as buyers
in getting deals done. Hence, they refer clients to loan providers who can
generally be depended upon to close on time.
Sales agents have no comparable interest in
the mortgage price, and are not concerned if the price is a little above the
market. However, the agent doesn�t want the price to be so far out of line
that the borrower throws a fit and blames the agent.
Loan providers spend a lot of time
cultivating the favor of sales agents. The law prohibits paying for referrals,
but it is not enforceable and violations occur � how frequently, nobody knows.
I would much prefer a referral from an agent who doesn�t get paid by the loan
provider.
Other Borrowers: Your
close friend strongly recommends a loan provider he recently used. You know the
source of the referral is trustworthy and has no financial interest in your
selection, and that�s very important. But the opinion is based on a single
experience that might be skewed � especially if his transaction and yours are
very different.
Here are some questions to put to your
referral source: First, how well did you do in the pricing, and how do you know?
Did you shop other sources?
Second, how well did the loan officer do in Q
and A? Was he willing to take the time to answer your questions? Have you
checked any of his answers against other sources?
Third, how reliable was he? Did he do what he
said he was going to do, when he said he was going to do it?
Referral from a trusted source can be
valuable, but only if the source has solid reasons for it.
Builders: Builder
referrals are usually to a lender with whom the builder has a financial
arrangement. Hence, they are suspect.
In some cases, preferred lenders price loans
above the market and kick back some of the excess to the builder. You can avoid
this trap by shopping other sources.
It is not so easy to avoid the trap when the
builder offers a concession if you use the preferred lender. In this case, the
builder has padded the house price, and is offering back part of what has been
taken from you. If you don�t accept it, you lose even more.
Suppose the builder pads the sale price by
$5,000, but offers a concession of $5,000 if you use the preferred lender. The
builder gives the $5,000 to the lender, who prices the loan, say, $3,000 above
the market. If you take the loan, you are ahead by $2,000, relative to turning
it down. But you are out $3,000 compared to what you would have had to pay if
the builder had no preferred lender and didn�t pad the sale price.
The only way a buyer can avoid this trap is
to refuse deals that tie concessions to use of a preferred lender. Offer the
builder the ask price less the concession.
Internet Referrals:
Most internet referrals are clearly advertisements, and should be viewed with
the same skepticism as ads in any other media.
Recently, a loan provider offered to place a
banner ad on my web site, for which he would pay me $5 for every click on the
banner, and $300 for every one that became a closed loan. I said no, but not
because I think there is anything wrong with such ads. Sometimes there is useful
information in the fluff. What I don�t like are disguised ads, and
there is quite a lot of that on the internet.
Name Lenders:
Some borrowers seek the comfort of a trusted name as their loan provider. Their
logic is that a lender with a reputation to protect is not going to jeopardize
it by over-charging borrowers.
There is some but not much merit in this
approach. Some name lenders systematically price above the market. Their policy
is that borrowers should pay for the comfort of dealing with them.
In addition, the loan officers employed by
these lenders have some discretion in pricing loans. If the loan officer tabs
you as unknowledgeable and timid, you will probably pay an "overage"
-- a price above the price listed on the loan officer�s price sheet. The
lender and the loan officer usually share overages. If you are smart and
forceful, on the other hand, you might get an underage -- a price below the
listed price. There are many more overages than underages.
On the other hand, name lenders cap the size
of overages. Although you may pay too much dealing with a name lender, the
overpayment won�t be outrageous.
Realtor Captives:
A special case of sales agent referrals are those to in-house or
"captive" loan providers. These are loan providers who have a close
financial relationship with Realtor firms. Most large Realtor firms have
captives.
It might appear that Realtor captives present
the same problems as builder captives, but there are significant differences. In
the case of Realtor captives, referrals do not involve house price concessions,
and the abuses associated with this practice.
Furthermore, referrals to the captive are
made by individual sales agents, not by the Realtor firm. Sales agents are
independent contractors and can�t be forced to refer their clients to the
captive lender. The captive must earn the trust and confidence of the agents.
Many Realtor captives have failed because they have not been able to do this.
On balance, therefore, I view sales agent
referrals to captive lenders as reliable as referrals to outside lenders.
Copyright Jack Guttentag 2003
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