February 15, 2015

The Consumer Financial Protection Bureau (CFPB) deplores the fact that almost half of the home buyers it recently surveyed did not shop for a mortgage but dealt with a single loan provider. To encourage shopping, the agency has developed a “Check Interest Rate” tool. It  advises borrowers: “As you start talking to lenders, compare their offers to the rates in the tool to see if you are getting a good deal.”

My advice to borrowers: ignore the CFPB tool, it is completely useless. The tool a borrower needs is a “shopping rate”, a rate that a competing lender should match or better. CFPB shows a distribution of rates, and leaves it to the shopper to decide which rate in the distribution is the shopping rate, while providing no guidance on how to do it.

For example, given the loan features I entered on Feb. 10, CFPB told me that “In Pennsylvania, most lenders in our data are offering rates at or below 4.188%.” But two lenders in the distribution charge 4% and one charges 3.75%, so should a shopper look for 4.188%, 4% or 3.75%? That is not clear. A valid shopping rate depends on a number of factors that CFPB does not consider.

Competitiveness: For a shopping rate to be the best rate available on a particular transaction, it should come from a competitive segment of the market. CFPB shows a distribution of rates by “a mix of large banks, regional banks and credit unions.” This means that the rates come from a hodgepodge of market structures, which could range from highly competitive to local monopoly.

Transaction Timing: For a shopping rate to be relevant to a particular shopper, it must be timely. Mortgage lenders set their rates every morning after they have checked the opening prices in secondary markets. The prices quoted to mortgage shoppers by loan originators during the day will in most cases be the prices that were updated the same morning. The same is true of the prices displayed on many web sites, including mine.

The rate that shoppers will find on the CFPB site, in contrast, “…is updated every business day in the evening.” This means that it is always stale. If the market changes overnight, which is often the case, the CFPB rate will not be comparable to the rates quoted to a shopper during the day. The timing disparity is particularly pronounced on Mondays, when the CFPB rate harks back to the preceding Friday.

Lender Fees: Fees charged by lenders are an important component of the  mortgage price. The total price is the rate plus fees expressed as a percent of the loan (“points”), plus fees that are a fixed-dollar amount. A rate quote without fees is useless.

The rates posted by CFPB are for loans with points between -0.5 and +0.5% of the loan, but fixed-dollar fees are not specified. This means that a lender can meet the CFPB shopping rate presented by a shopper, yet over-charge the borrower by padding the fixed-dollar fees. Conceivably that could explain the 3.75% rate in Pennsylvania cited earlier.

Transaction Features: For a shopping rate to be valid, it must apply to the individual shopper’s transaction. A shopper looking to buy tomatoes is not helped by being told a competitive price for apples. My article last week identified 9 features of a home mortgage loan transaction that affected the rate: credit score, loan amount, down payment, state location of property, type of property, purpose of loan, type of occupancy, lock period, and waiver of escrow. Shoppers using the CFPB site to find a shopping rate are asked to input the first four items in that list. The other 5 factors are fixed by CFPB, which means that its shopping rate applies only to:

*Single-family properties, which excludes condos and 2-4 family units.

*Purchase transactions, which excludes refinances in which the borrower withdraws cash.

*Primary residences, which excludes investment properties and second homes.

*60-day rate lock, which excludes refinances that have 30 or 45 day locks, which most do.

*Acceptance of tax and insurance escrow, which excludes transactions in which the borrower wishes to avoid escrow.

Nowhere on the CFPB site are users warned that the posted rates may not apply to their transaction.

An Alternative: Borrowers who are looking for the kind of mortgage shopping help that CFPB is trying to deliver but doesn’t can now go to my home page and click on Find Your Mortgage Shopping Rate. That  shopping rate reflects the most competitive segment of the home loan market, is always current, is based on zero total fees, and has none of the coverage exclusions of the CFPB effort.