Mortgage Lead Generation Sites
May 20, 2002, Revised April 20, 2006, October 10, 2008,
April 11, 2011
Note: For a more recent and concise treatment, see Do Lead Generation Sites Help Mortgage Borrowers?
"You have discussed internet referral sites and individual lender sites, but I don’t see any reference to Lending Tree, which does a lot of advertising. Where does it fit?"
Lending Tree is a "lead generation sites". A "lead" is a packet of information about a consumer in the market for a loan. Lenders pay for leads, and lead generation sites are an important source of them. See Mortgage Leads: Are You One?
In preparing this column, I looked at 9 mortgage lead generation sites: Cityloans.com, Getsmart.com, Interestratesonline.com, Lendingtree.com, Loanapp.com, Loanhounds.com, Loanweb.com, Lowestmortgage.com, and Mortgageexpo.com. While Lending Tree is ahead of the others, their similarities are more important than their differences.
All of these sites essentially work the same way. The prospective borrower fills out a questionnaire covering the loan request, property, personal finances, and contact information. The completed questionnaire is the lead that is sold to lenders. The lenders purchasing the lead then prepare an offer to the borrower based on the same information.
In developing their questionnaires, lead generation sites are pulled in two directions. The more complete the questionnaire, the more valuable the lead to lenders and the more they will be willing to pay for it. On the other hand, long questionnaires discourage some borrowers -- especially those with short attention spans, or who are suspicious that their information will be misused -- which means that fewer of them will complete the form.
Each lender participating in the site fills out a filter form that indicates the features of loans they are willing to make. The features on the form include credit score, loan size, loan-to-value ratio, property zip code, type of property, whether there is a second mortgage on the property, and so on. The leads offered to each lender are those with the features that the lender has indicated that they want. For example, an applicant with poor credit who wants to purchase a condominium would not be referred to a lender who has told the site it only wants loans to A-quality borrowers purchasing or refinancing single-family homes.
In principle, the lender filtering process should be valuable to borrowers with one or more challenging features, such as poor credit, incomplete documentation, or little cash. Such borrowers can avoid wasting time soliciting lenders who won’t deal with them. In the post-financial crisis market, however, where all but a handful of loans are either sold to Fannie Mae or Freddie Mac, or insured by FHA, I would expect the filters to be very similar. For example, before the crisis lenders might differ in the types of documentation they were willing to accept among the 6-7 types that existed then, but in the post-financial crisis market, all loans must be fully documented. This limits the value of the filtering process to borrowers.
Leads are sold to the lenders who will pay the most for them, though the site also considers the number of leads that a lender wants. The lender who commits to purchase 1,000 leads will pay less per lead than a lender who only wants to buy 10. The sites claim that they will sell the same lead to only 3 lenders, but some lenders think that some sites cheat and sell to more than 3. Aside from that lurking suspicion, the market for leads seems to be quite efficient. and it certainly is competitive.
But a competitive market in leads does not necessarily result in a competitive market for loans.
The answer depends first on whether the initial price quotes provided through the sites are complete enough to allow borrowers to make intelligent choices. Second, it depends on whether borrowers are protected against "sharp practices" by lenders during the period between initial price quotes and the time when the price is "locked".
Initial Price Quotes: Fixed-rate mortgages (FRMs) have 3 price components: interest rate, points (upfront charges expressed as a percent of the loan), and lender fees (upfront charges expressed in dollars). Borrowers can’t shop effectively unless they have all three.
Lending Tree is unique among lead generation sites in displaying the three price components from all responding lenders on its site. The lenders selected by the other sites provide prices over the telephone, email, or fax. In many cases, the prices don’t include lender fees, and in all cases (except Lending Tree) borrowers must record and organize this information for themselves.
Adjustable rate mortgages (ARMs) have additional price components: the interest rate index used by the ARM, the margin that is added to the index in resetting the rate on an adjustment date, any caps on the size of rate changes, and the maximum rate. None of the lead generation sites provide this information, which has to be obtained directly from loan officers. Borrowers who might hold an ARM past the first rate adjustment date need this information, but most don’t realize they should ask for it.
Sharp Practices: A mortgage lender quoting prices on an lead generation site is not bound by those prices. Mortgage prices are reset every morning, and sometimes during the day. The price quotes that borrowers use to select a lender, even if complete, apply only to the day they are posted. The next day the quotes are obsolete. For price updates, borrowers are dependent on the loan officers who contact them.
The only prices that really matter are those quoted at the time the borrower locks the loan with the lender. The borrower who selects one lender to work with based on the initial price quote is vulnerable to gamesmanship. An initial price that is favorable to the borrower, because there was competition at that point, is converted to a locked price that is more favorable to the lender.
This is done by overstating the rise in market prices that occurs between the time of the initial quote and the lock date -- or understating the decline. For example, the initial quote was 7% at zero points, the market on the lock day is 6.75%, but the borrower is locked at 6.875%.
Sharp lenders also may pad their loan fees, particularly if they hadn’t included any fees in the initial price quote to the borrower. Indeed, fee padding can extend right through to closing, since locks only cover rates and points.
These practices pervade the home loan market. The question is whether lead generation sites provide any protection against them? They claim to, through their due diligence in selecting and monitoring lenders. Lending Tree provides a scorecard of lender performance based on reports from borrowers, and also assigns a "personal custom care advocate" to each borrower.
There was no way for me to assess the effectiveness of these protections. It is plausible that they may prevent flagrant or obvious abuses, but certainly not the more subtle ones. The borrower who pays 6.75% when the competitive rate is 6.625% usually doesn’t know it, and neither does the site.
In sum, except for FRMs on Lending Tree, lead generation sites don’t offer the complete pricing required for effective competition. How well they do in protecting borrowers against lender abuses is unclear, but I’m skeptical. Clearly, they could do a lot better on both scores, and I’ll indicate how below.
Here I want to sketch the features of an lead generation site that would provide competitive pricing, and also facilitate better loan decisions. Call it the "Generation Two" (GT) site.
Complete Prices on Line: The GT site would provide complete pricing on-line for the ("up to 4") lenders selected by the site for a particular borrower. If borrowers are going to select the best deal, they must have complete price information.
On fixed-rate mortgages (FRMs), required information includes the interest rate, points (an upfront charge expressed as a percent of the loan), and lender fees (upfront charges expressed in dollars).
On adjustable rate mortgages (ARMs), the GT site would disclose these as well as other price components. But more importantly, the site would pull all these factors together in projections of future performance. On any ARM offered by participating lenders, borrowers would be shown what might happen to the interest rate and mortgage payment at future rate adjustment dates under different assumed scenarios. These would include a scenario where market interest rates are stable, and one where they explode – a "worst case".
"Try-on" Capacity: In selecting their lender, borrowers would not be limited to the one or a few loan programs received from each lender. Through the GT site, they would have access to all the programs of each lender, so they can "try them on." The selection tools noted below will help them make decisions.
Guaranteed Dollar Fees: The site would require lenders to guarantee their dollar fees at the outset. This imposes minimum hardship on lenders while removing a pervasive source of potential abuse.
Selection Tools: In shopping for a mortgage borrowers have 4 decisions to make: type of loan – whether FRM or ARM, and if the latter, which of many variants; loan term; down payment; and rate/point combination – high points and low interest rate, or the reverse.
The GT site will have on-site selection tools that will help borrowers make these decisions at the time they select the lender. One of these tools, designed to help borrowers select among ARMs or between an ARM and a FRM, was described above.
Existing lead generation sites help very little in making these decisions. The unstated assumption is that these decisions have been made at the time the borrower fills out the questionnaire. But often that is not the case, and even when it is, the decision may be poorly grounded.
Some of the existing sites have calculators that are supposed to help with these decisions, but the prices must be obtained somewhere else, which greatly reduces their value. The tools on the GT site will use live market data from the participating lenders.
Price Change Protection: A borrower selects a lender from a lead generation site based on that lender’s initial price quote, but the lender is not bound by that quote. Lenders may practice gamesmanship during the period between the initial quote and the time when the price is locked. If market prices decline in that period, for example, the lender might neglect to reduce the lock price.
On existing sites, the only protection against gamesmanship of this type is monitoring by the site, but borrowers would be far better off protecting themselves if they had the tools with which to do it. The GT lead generation site will provide the tools.
First, the GT site will have a rule, to which lenders must subscribe, that the lock price must always be the same as the price the lender is offering to new customers on the same day. Second, the site will give borrowers continual on-line access to the prices posted by their lender until the loan closes. This will allow borrowers to do their own monitoring to assure that the lender follows the rule..
The GT lead generation site won’t appear anytime soon. In the meantime, here is how borrowers can make the best use of existing sites.
This is the advice that should be posted at the top of each lead generation site.
1. Before using this site, you should have decided whether you want a fixed or adjustable rate mortgage, as well as your preferred loan term, down payment, and points. If you are uncertain about any of these, do some homework. You might peruse the relevant sections of this web site, especially the Tutorials on Selecting Mortgage Features.
2. Fill out the questionnaire as accurately and completely as you can. We use the information you provide, together with information we have on the preferences of our lenders, to match you with the lenders most likely to be interested in your loan. Our matching can be no better than the information we receive from you.
3. This site does not provide mortgage price information. That comes from the lenders who contact you. The amount of price information they give you may depend on what you ask for. Remember that on fixed-rate mortgages you need the interest rate, points and dollar fees. While some lenders are not in the habit of providing their dollar fees in initial price quotes, you can insist upon it.
4. If you are interested in an adjustable rate mortgage (ARM), you need to know more than the rate, points and loan fees. Also ask the lenders for the interest rate index, margin, all rate adjustment caps, and maximum rate. Once you have that information, you can see use the Mortgage Professor’s calculator Monthly Payments on Adjustable Rate Mortgages to see how the payment might change.
5. Receiving price quotes over the telephone is looking for trouble. Ask lenders to email or fax their prices to you.
6. The interest rate and points quoted to you by a lender apply only to the day you receive them. The lender is not bound to them the following day, since the market may have changed. For the same reason, it is not safe to compare a price received on Monday from one lender with a price received on Tuesday from another.
7. The prices that really matter are those quoted to you on the day you "lock" the loan with the lender. The lock means that the lender is committed to the prices, and so are you!
8. Since locking imposes costs on lenders, they want some evidence of your commitment to the deal before they will lock. Their requirements vary widely, however, ranging from very little, to a signed application, to a signed application plus a non-refundable payment. You are entitled to know at the outset exactly what each lender’s requirements are, and how long it should take if you do everything expected of you. Ask!!!
9. Since you selected the lender based on the initial price quote but it is the locked price that you are going to pay, you have a right to know how the lender will set the price on the day you lock. You need not accept a statement that the new price "will be at the market". The answer you are looking for is that the lock price will be the same as the price the lender is quoting to new customers on the identical loan on the same day. Ask if the lender has a web site that contains up-to-date prices that you can use to monitor your price day by day. If it does not, ask the loan officer how he intends to demonstrate that you have received the correct price.
10. Unlike rates and points, loan fees are not market driven. Unless you change one or more of the loan characteristics, there is seldom a good reason for these fees to change between the time you receive the initial price quote and the time you close.
Some lenders will guarantee these fees in writing if you ask. Bear in mind that these are lender fees only, a lender can’t guarantee the fees of third parties. However, lenders may be willing to include appraisal fees and credit charges in a guarantee because they order them and know how much they cost.
Note: For a more recent and concise treatment, see Do Lead Generation Sites Help Mortgage Borrowers?
"You have discussed internet referral sites and individual lender sites, but I don’t see any reference to Lending Tree, which does a lot of advertising. Where does it fit?"
Lending Tree is a "lead generation sites". A "lead" is a packet of information about a consumer in the market for a loan. Lenders pay for leads, and lead generation sites are an important source of them. See Mortgage Leads: Are You One?
In preparing this column, I looked at 9 mortgage lead generation sites: Cityloans.com, Getsmart.com, Interestratesonline.com, Lendingtree.com, Loanapp.com, Loanhounds.com, Loanweb.com, Lowestmortgage.com, and Mortgageexpo.com. While Lending Tree is ahead of the others, their similarities are more important than their differences.
How Lead Generation Sites Work: The Questionnaire
All of these sites essentially work the same way. The prospective borrower fills out a questionnaire covering the loan request, property, personal finances, and contact information. The completed questionnaire is the lead that is sold to lenders. The lenders purchasing the lead then prepare an offer to the borrower based on the same information.
In developing their questionnaires, lead generation sites are pulled in two directions. The more complete the questionnaire, the more valuable the lead to lenders and the more they will be willing to pay for it. On the other hand, long questionnaires discourage some borrowers -- especially those with short attention spans, or who are suspicious that their information will be misused -- which means that fewer of them will complete the form.
How Lead Generation Sites Work: The Filter
Each lender participating in the site fills out a filter form that indicates the features of loans they are willing to make. The features on the form include credit score, loan size, loan-to-value ratio, property zip code, type of property, whether there is a second mortgage on the property, and so on. The leads offered to each lender are those with the features that the lender has indicated that they want. For example, an applicant with poor credit who wants to purchase a condominium would not be referred to a lender who has told the site it only wants loans to A-quality borrowers purchasing or refinancing single-family homes.
In principle, the lender filtering process should be valuable to borrowers with one or more challenging features, such as poor credit, incomplete documentation, or little cash. Such borrowers can avoid wasting time soliciting lenders who won’t deal with them. In the post-financial crisis market, however, where all but a handful of loans are either sold to Fannie Mae or Freddie Mac, or insured by FHA, I would expect the filters to be very similar. For example, before the crisis lenders might differ in the types of documentation they were willing to accept among the 6-7 types that existed then, but in the post-financial crisis market, all loans must be fully documented. This limits the value of the filtering process to borrowers.
How Lead Generation Sites Work: Selling Leads
Leads are sold to the lenders who will pay the most for them, though the site also considers the number of leads that a lender wants. The lender who commits to purchase 1,000 leads will pay less per lead than a lender who only wants to buy 10. The sites claim that they will sell the same lead to only 3 lenders, but some lenders think that some sites cheat and sell to more than 3. Aside from that lurking suspicion, the market for leads seems to be quite efficient. and it certainly is competitive.
But a competitive market in leads does not necessarily result in a competitive market for loans.
Do Lead Generation Sites Promote a Competitive Market in Loans?
The answer depends first on whether the initial price quotes provided through the sites are complete enough to allow borrowers to make intelligent choices. Second, it depends on whether borrowers are protected against "sharp practices" by lenders during the period between initial price quotes and the time when the price is "locked".
Initial Price Quotes: Fixed-rate mortgages (FRMs) have 3 price components: interest rate, points (upfront charges expressed as a percent of the loan), and lender fees (upfront charges expressed in dollars). Borrowers can’t shop effectively unless they have all three.
Lending Tree is unique among lead generation sites in displaying the three price components from all responding lenders on its site. The lenders selected by the other sites provide prices over the telephone, email, or fax. In many cases, the prices don’t include lender fees, and in all cases (except Lending Tree) borrowers must record and organize this information for themselves.
Adjustable rate mortgages (ARMs) have additional price components: the interest rate index used by the ARM, the margin that is added to the index in resetting the rate on an adjustment date, any caps on the size of rate changes, and the maximum rate. None of the lead generation sites provide this information, which has to be obtained directly from loan officers. Borrowers who might hold an ARM past the first rate adjustment date need this information, but most don’t realize they should ask for it.
Sharp Practices: A mortgage lender quoting prices on an lead generation site is not bound by those prices. Mortgage prices are reset every morning, and sometimes during the day. The price quotes that borrowers use to select a lender, even if complete, apply only to the day they are posted. The next day the quotes are obsolete. For price updates, borrowers are dependent on the loan officers who contact them.
The only prices that really matter are those quoted at the time the borrower locks the loan with the lender. The borrower who selects one lender to work with based on the initial price quote is vulnerable to gamesmanship. An initial price that is favorable to the borrower, because there was competition at that point, is converted to a locked price that is more favorable to the lender.
This is done by overstating the rise in market prices that occurs between the time of the initial quote and the lock date -- or understating the decline. For example, the initial quote was 7% at zero points, the market on the lock day is 6.75%, but the borrower is locked at 6.875%.
Sharp lenders also may pad their loan fees, particularly if they hadn’t included any fees in the initial price quote to the borrower. Indeed, fee padding can extend right through to closing, since locks only cover rates and points.
These practices pervade the home loan market. The question is whether lead generation sites provide any protection against them? They claim to, through their due diligence in selecting and monitoring lenders. Lending Tree provides a scorecard of lender performance based on reports from borrowers, and also assigns a "personal custom care advocate" to each borrower.
There was no way for me to assess the effectiveness of these protections. It is plausible that they may prevent flagrant or obvious abuses, but certainly not the more subtle ones. The borrower who pays 6.75% when the competitive rate is 6.625% usually doesn’t know it, and neither does the site.
In sum, except for FRMs on Lending Tree, lead generation sites don’t offer the complete pricing required for effective competition. How well they do in protecting borrowers against lender abuses is unclear, but I’m skeptical. Clearly, they could do a lot better on both scores, and I’ll indicate how below.
How Lead Generation Sites Could Do Better
Here I want to sketch the features of an lead generation site that would provide competitive pricing, and also facilitate better loan decisions. Call it the "Generation Two" (GT) site.
Complete Prices on Line: The GT site would provide complete pricing on-line for the ("up to 4") lenders selected by the site for a particular borrower. If borrowers are going to select the best deal, they must have complete price information.
On fixed-rate mortgages (FRMs), required information includes the interest rate, points (an upfront charge expressed as a percent of the loan), and lender fees (upfront charges expressed in dollars).
On adjustable rate mortgages (ARMs), the GT site would disclose these as well as other price components. But more importantly, the site would pull all these factors together in projections of future performance. On any ARM offered by participating lenders, borrowers would be shown what might happen to the interest rate and mortgage payment at future rate adjustment dates under different assumed scenarios. These would include a scenario where market interest rates are stable, and one where they explode – a "worst case".
"Try-on" Capacity: In selecting their lender, borrowers would not be limited to the one or a few loan programs received from each lender. Through the GT site, they would have access to all the programs of each lender, so they can "try them on." The selection tools noted below will help them make decisions.
Guaranteed Dollar Fees: The site would require lenders to guarantee their dollar fees at the outset. This imposes minimum hardship on lenders while removing a pervasive source of potential abuse.
Selection Tools: In shopping for a mortgage borrowers have 4 decisions to make: type of loan – whether FRM or ARM, and if the latter, which of many variants; loan term; down payment; and rate/point combination – high points and low interest rate, or the reverse.
The GT site will have on-site selection tools that will help borrowers make these decisions at the time they select the lender. One of these tools, designed to help borrowers select among ARMs or between an ARM and a FRM, was described above.
Existing lead generation sites help very little in making these decisions. The unstated assumption is that these decisions have been made at the time the borrower fills out the questionnaire. But often that is not the case, and even when it is, the decision may be poorly grounded.
Some of the existing sites have calculators that are supposed to help with these decisions, but the prices must be obtained somewhere else, which greatly reduces their value. The tools on the GT site will use live market data from the participating lenders.
Price Change Protection: A borrower selects a lender from a lead generation site based on that lender’s initial price quote, but the lender is not bound by that quote. Lenders may practice gamesmanship during the period between the initial quote and the time when the price is locked. If market prices decline in that period, for example, the lender might neglect to reduce the lock price.
On existing sites, the only protection against gamesmanship of this type is monitoring by the site, but borrowers would be far better off protecting themselves if they had the tools with which to do it. The GT lead generation site will provide the tools.
First, the GT site will have a rule, to which lenders must subscribe, that the lock price must always be the same as the price the lender is offering to new customers on the same day. Second, the site will give borrowers continual on-line access to the prices posted by their lender until the loan closes. This will allow borrowers to do their own monitoring to assure that the lender follows the rule..
The GT lead generation site won’t appear anytime soon. In the meantime, here is how borrowers can make the best use of existing sites.
Check-List on How to Use Lead Generation Sites
This is the advice that should be posted at the top of each lead generation site.
1. Before using this site, you should have decided whether you want a fixed or adjustable rate mortgage, as well as your preferred loan term, down payment, and points. If you are uncertain about any of these, do some homework. You might peruse the relevant sections of this web site, especially the Tutorials on Selecting Mortgage Features.
2. Fill out the questionnaire as accurately and completely as you can. We use the information you provide, together with information we have on the preferences of our lenders, to match you with the lenders most likely to be interested in your loan. Our matching can be no better than the information we receive from you.
3. This site does not provide mortgage price information. That comes from the lenders who contact you. The amount of price information they give you may depend on what you ask for. Remember that on fixed-rate mortgages you need the interest rate, points and dollar fees. While some lenders are not in the habit of providing their dollar fees in initial price quotes, you can insist upon it.
4. If you are interested in an adjustable rate mortgage (ARM), you need to know more than the rate, points and loan fees. Also ask the lenders for the interest rate index, margin, all rate adjustment caps, and maximum rate. Once you have that information, you can see use the Mortgage Professor’s calculator Monthly Payments on Adjustable Rate Mortgages to see how the payment might change.
5. Receiving price quotes over the telephone is looking for trouble. Ask lenders to email or fax their prices to you.
6. The interest rate and points quoted to you by a lender apply only to the day you receive them. The lender is not bound to them the following day, since the market may have changed. For the same reason, it is not safe to compare a price received on Monday from one lender with a price received on Tuesday from another.
7. The prices that really matter are those quoted to you on the day you "lock" the loan with the lender. The lock means that the lender is committed to the prices, and so are you!
8. Since locking imposes costs on lenders, they want some evidence of your commitment to the deal before they will lock. Their requirements vary widely, however, ranging from very little, to a signed application, to a signed application plus a non-refundable payment. You are entitled to know at the outset exactly what each lender’s requirements are, and how long it should take if you do everything expected of you. Ask!!!
9. Since you selected the lender based on the initial price quote but it is the locked price that you are going to pay, you have a right to know how the lender will set the price on the day you lock. You need not accept a statement that the new price "will be at the market". The answer you are looking for is that the lock price will be the same as the price the lender is quoting to new customers on the identical loan on the same day. Ask if the lender has a web site that contains up-to-date prices that you can use to monitor your price day by day. If it does not, ask the loan officer how he intends to demonstrate that you have received the correct price.
10. Unlike rates and points, loan fees are not market driven. Unless you change one or more of the loan characteristics, there is seldom a good reason for these fees to change between the time you receive the initial price quote and the time you close.
Some lenders will guarantee these fees in writing if you ask. Bear in mind that these are lender fees only, a lender can’t guarantee the fees of third parties. However, lenders may be willing to include appraisal fees and credit charges in a guarantee because they order them and know how much they cost.