Third of a Series on the Certified-Lender Network: Providing Competitive
Pricing of Third Party Services
This is the third of the series of articles that served as a blueprint for the Certified Lender Network (CLN) that was under development when they were written early in 2011. The CLN became operational early in 2012. Check the menu to the right of this page.
The previous article in this series described how the CNL will provide competitive loan pricing. This article describes how it will provide competitive pricing of the third party services that are required accessories to home mortgage loans. In some respects, this is an even greater challenge.
Third Party Services Are Over-Priced
taking a home mortgage today pays a private tax in the form of
unnecessary charges for the various third party services required to
deliver the mortgage. These include services provided by title
insurance companies, mortgage insurance companies, appraisers, credit
reporting agencies, flood insurance companies, escrow companies, and
The taxes are paid to those who are positioned to refer borrowers to specific service providers. These referral agents are mainly lenders, but some are Realtors and builders. The payments include referral fees, which are sometimes legal and sometimes illegal. Some of the tax is absorbed by the high marketing expenses incurred by service providers soliciting the business of referral agents.
The problem is not that there isn’t competition in these industries, the competition is actually intense, but it is directed to referral agents rather than to the consumers who pay for the service. Competition directed to referral agents drives prices to the consumer up rather than down, since most agents are more interested in being paid for the referral than in negotiating lower prices for consumers.
The Source of Referral Power
Why don’t borrowers select their own service providers? The major reason is that their focus is on their primary need, which is the home purchase and the loan. The path of least resistance, which most take, is to allow their major contact to handle the incidentals. This is what gives lenders, Realtors and builders their referral power.
The Case of Private Mortgage Insurance
Private mortgage insurance (PMI) is a good example. Under existing arrangements, the lender selects the carrier – the borrower is never consulted, even though the borrower pays the premium. If there is another carrier offering the same policy for a lower premium the borrower does not know about it and the lender does not care. The insurer selected is the one providing the most valuable set of services to the lender, not the one offering the lowest premium to the borrower.
Mortgage insurers also offer multiple premium plans, including monthly premiums and single financed premiums, One or the other may be least costly to a borrower, depending on how long they expect to have the mortgage, their tax rate, and their opportunity cost – how much they earn on their investments. Very few lenders offer borrowers their choice of premium plans, and none offer the decision support that should go along with it. It is a bother and takes too much time.
Third Party Services on the Certified Lender Network
The CLN, instead of locking the borrower into a decision made by the lender, provides competitive options. MGIC offers PMI directly to borrowers on the network, quoting prices for monthly premium and also single-premium plans, with guidance on how to make a selection provided by me. Similarly, Boston National offers title insurance along with my suggestions about how to compare premium quotes from different sources. Plans are to expand the number of mortgage and title insurers on the network in the future.
While we can't guarantee that the service providers on the CLN will offer lower premiums than others, their marketing expenses will be far lower than those involved in marketing to lenders, who look for free or low-price services as quid pro quo for their referrals. The combination of lower marketing expenses and price competition should reduce prices to borrowers.
The network will
also offer decision support in connection with the selection of the best
mortgage program and the best combination of interest rate and points.
This is discussed in
Fourth of a Series on Certified Lender Networks: Providing Decision