January 20, 2012

Since 1998, the professor has counseled over 25,000 mortgage borrowers on how to keep from getting ripped off and how to make critical decisions. Recently, he decided that his counsel could be substantially improved, and more borrowers could be reached, if he created a network of lenders that was directed to these objectives. The resulting Certified Lender Network  (CLN):

• Generates competitive prices to borrowers while shielding them from the various tricks of the mortgage banking trade. 

• Helps borrowers make the right decisions by providing the best possible decision support. 

The CLN features discussed below are all designed to further these objectives.

  Borrower Access to Lender Prices and Underwriting Rules 

Most of the tricks used to extract higher prices from borrowers are based on the loan originator (LO, the loan officer or mortgage broker) intermediating in the pricing process. Prices go from the lender’s pricing system to the LO to the borrower. This allows pricing discretion by the LO, which is what has made the home mortgage market a type of bazaar.

 On the CLN, prices go from the lender’s pricing system to the CLN to borrowers. The difference is that the CLN passes them along unchanged. This eliminates low-balling, the process of quoting prices below the price the LO has any intention of delivering, in order to snag the customer. It also eliminates opportunistic pricing, where the LO raises the price as circumstances allow. For example:

• Borrowers can’t be placed in the wrong price niche because the borrower always has access to the correct niche-specific price. 

• Changes in the market price prior to lock cannot be misrepresented because the borrower has access to the correct market prices, and can monitor them until the loan is locked. 

• Loan fees cannot be discovered that were not there earlier, because the borrower can see the fees.

A 7-Step Process In the Correct Order For Meeting Borrower Needs

In finding a mortgage on the CLN, borrowers do not begin by selecting a lender. That is step 5 of a process that prepares the borrower for it. At step 5, borrowers have decided how much help they want in negotiating the process, have qualified themselves, and know the type of mortgage and the combination of interest rate and lender fees that they want.

 The steps are as follows:

1. Borrowers select from alternative paths based on their need for help.

2. Borrowers qualify themselves to determine whether or not to proceed.

3. Borrowers select the type of mortgage that best meets their needs.

4. Borrowers select the combination of interest rate and lender fees that best meets their needs.

5. Borrowers select the lender.

6. Borrowers monitor the price of their loan until it is locked.
7. Borrowers check the prices of title insurance and mortgage insurance quoted by insurers selected by the lender against the prices posted by the insurers on the CLN.

Different Paths For Borrowers With Different Needs

Borrowers vary greatly in their knowledge of mortgages, their interest in learning more, and their competence in navigating web sites. To meet diverse needs, the professor provides multiple paths from which users may select.

• Full Path with Automated Guidance: This 7-step path is for the majority of borrowers who want help and can navigate through automated decision support on their own.
• Fast Path: This 6-step path is for borrowers who know they qualify but in other respects want the full automated decision support.
• Faster Path: This 5-step path is for borrowers who know they qualify and know the type of mortgage they want, but in other respects want the full automated decision support.
• Guided Path: This path is for borrowers who want their hand held by an expert as they go through the 7-step process. They can join a group free of charge, or pay for one-on-one support.

Borrowers Can Qualify Themselves Before Proceeding

Borrowers can reduce uncertainty on whether or not they qualify before investing any more time in the process. The analysis covers the three core areas:

1. History of bankruptcy and foreclosure.

2. Credit score and down payment.

3. Ratios of borrower income to expense. 

The analysis is not conclusive, an underwriter always makes the final decision. However, it is accurate enough to alert borrowers who have no chance of being approved that they would do well to spend their time improving their credentials. In such cases, help is offered that is geared to specific weaknesses. Borrowers who are close to qualifying on one side or the other are shown exactly how close they are. 

For more detail on the CLN qualification process, see Can You Qualify in Today's Market? Introducing the Professor's Mortgage Qualification Tool  

Decision Support

Mortgage borrowers often make bad decisions regarding the type of mortgage they want, and the best combination of interest rate and fees on the selected type of mortgage. Borrowers approach these decisions with a built-in bias toward the short-term, specifically the initial payment and required cash outlays, and tend to ignore longer-term impacts on their wealth. The process reinforces the bias, rather than countering it.

1. Borrowers are forced to make these decisions together, which is often confusing.
2. Borrowers do not have access to information that bears on long-run impacts on wealth.
3. LOs are primarily motivated to get deals done and prefer not to raise issues that could complicate and delay the process, even if they were qualified to do so, which many if not most are not.

The CLN, in contrast, prods borrowers to confront and possibly over-rule the biases they bring to the process.

• The decision process is broken down into discrete steps. Borrowers first select the type of mortgage, then the interest rate and fee combination on that type of mortgage, and only then do they select the lender.
• At the first 2 decision steps, for each of the options from which a selection is being made, CLN provides a personalized measure of the impact on wealth over the period the borrower expects to have the mortgage. The professor calls this measure the “Time Horizon Cost”, or THC. It equals:

• 	Upfront Cash Payments
  +	Monthly Payments of Principal, Interest and Mortgage Insurance
  +	Lost Interest on All Payments at the Borrower’s Opportunity Cost
  -	Tax Savings at the Borrower’s Tax Rate
  -	Reduction in the Loan Balance
  =	THC

• The counselors available on the CLN are all qualified to guide borrowers who opt for help.

For more detail on how borrowers select their preferred mortgage type and rate/fee combination on the CLN, see Integrated Calculators Ease the Pain of Making Difficult Mortgage Decisions.

Shop For Mortgage Insurance and Title Insurance

The prevailing practice is for lenders to select the title insurer and mortgage insurer, even though the borrower pays the premiums. That is a major reasons why borrowers are over-charged. See Is Title Insurance Overpriced? and Mortgage Insurance in the Post-Crisis Market: Why Is the Market Rigged Against Mortgage Borrowers?

The CLN will change that. As a beginning, borrowers using the CLN will have access to price quotes on title insurance from Boston National, and on mortgage insurance from MGIC. If the prices posted here are lower than those charged by the insurer selected by your lender, you can instruct the lender to obtain your insurance from Boston National and/or MGIC.  

Lender Certification

Lenders offering loans on the professor’s network are certified as CNLs, which means that they conform to the following rules and principles: 

• CNLs Transmit Their Prices and Underwriting Data to the Professor’s Network Electronically.   

• CNLs Must Disclose Complete Price Data, including all fixed-dollar fees and all features of ARMs that might affect future rate adjustments. 

• CNLs can charge borrowers a maximum fee of $295 to lock their loans, with the charge credited back to the borrower at closing.

• CNLs upon locking a loan must provide a lock confirmation statement that includes a specified list of loan features. 

• CNLs that do not lock immediately must lock at the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote.  

• CNLs that over-ride a price lock because a property appraisal alters the pricing must lower the price when the new appraisal calls for it.  

• CNLs who are responsible for failure to close within the lock period will extend the period at no cost to the borrower.  

• CNLs accept certified third party service providers listed on the site that have been selected by borrowers.

• CNLs will not give loan officers working with clients on the professor’s network discretion to adjust price, including lock fees

For more detail on CNL certification, see Why Shop Here: Certified Network Lenders..

Generating Quality Loan Prospects

The primary benefit of the CLN to participating lenders is that they receive quality loan prospects for which the rate of conversion into borrowers is high. The following features contribute to this:         

• Unqualified borrowers weed themselves out.
• Borrowers who contact lenders have been through a decision support process and know what they want.
• Borrowers are confident that the lender they select can’t give them a fast shuffle.
• Borrowers select a single lender.

A high conversion rate lowers lender origination costs, and because the CLN is competitive, the savings will be passed on to borrowers.