When Banks Compete, You Win -- Except When You Lose!
generally viewed as a good thing, in the US at least. Hence,
advertisements that create an image of powerful banks having
to compete among themselves for the favor of individual
mortgage borrowers creates a generally favorable impression.
The problem is that competition generates favorable results
only under certain conditions, and those conditions are very
difficult to find in the home mortgage market.
consider a market in which head-to-head competition by banks
does clearly benefit consumers: the market for insured
certificates of deposit (CDs). Competition works in the CD
market because CDs are easy for consumers to shop. They
merely look for the highest interest rate for the term and
the amount they want to commit. Today, they can find this
information at any number of web sites.
CDs are easy
to shop for three reasons, none of which apply to the home
The price is one-dimensional.
the CD market, the price is the interest rate, and while
banks can differ in how often the rate is compounded, the
effect of this on the yield earned by the consumer is
negligible. This makes shopping easy, even for the
the price of home mortgages is multi-dimensional, consisting
of an interest rate plus upfront fees, some expressed as a
percent of the loan amount (“points”), and some specified as
fixed dollar amounts. This complicates the process
enormously because it means that the lowest price depends on
how long the borrower expects to have the mortgage, which
varies from case to case.
Federal Government has tried to fix this by requiring
lenders to disclose a measure called the Annual Percentage
Rate, or APR, which reflect both the rate and the fees. But
in calculating the APR, lenders must assume that all
borrowers have their mortgage for the full term, which
defeats its purpose.
uncertainty as to what constitutes a “best price” makes it
difficult for consumers to compare offerings of competing
The quoted rate applies uniformly to
all consumers: The bank pays
the same CD rate to all consumers. In contrast, mortgage
prices vary with the features of the transaction. These
include loan size, ratio of loan amount to property value,
credit score, type of property, state of property location,
and type of occupancy.
mortgage prices are specific to a transaction, price quotes
are often inaccurate. Consumers may not have all the
relevant facts right, and loan providers have little
incentive to invest the time in providing accurate quotes to
borrowers who are price-shopping. It is easier to assume the
best features, which produces the lowest price.
The quoted price is valid.
Consumers shopping for a CD can be assured that a bank
quoting a rate is prepared to pay that rate to a consumer
electing to do business with it.
price to a shopper below the valid price, called
“low-balling,” is common practice in this market. It is
especially common among originators who know they are being
competition based on solicitation of price quotes from
alternative sources, which works to the advantage of
consumers in the CD market, does not work in the home
mortgage market. Consumers who solicit price quotes by
calling 3 or 4 loan providers are wasting their time. Many
realize this and select just one, often based on a referral,
and hope for the best.
solicit quotes through a web site that promises that 3 or 4
lenders will compete for their business – a “lead generation
site”. One of the largest of these is the source of the
“When banks compete, you win” ad.
generation sites collect transaction and contact information
from consumers, which they sell to 3 or 4 lenders who
contact the consumer with price quotes. Competition in the
market for leads works very well; the leads go to the
lenders who will pay the most for them.
generation sites are marginally better for the borrower than
calling 3 or 4 lenders on the phone because lenders who
purchase leads may have enough information to quote valid
prices. However, the borrower has no way to determine which
loan providers are low-balling to win the deal. The Achilles
heel of lead-generation sites is that, in many cases, the
biggest liar wins the deal.
for a mortgage who want assurance that all quoted prices are
valid should seek multi-lender web sites that post prices
received directly from lenders, not prices submitted by
intermediaries. A list of such sites can be found at
How Effectively Can You Shop at
Multi-Lender Web Sites?