Converting A Horrendous Market Structure Into The Best


In micro-economic textbooks, the main factor assumed to affect the quality of a market is the number of sellers. A single seller, termed a monopolist, is the worst because that seller has maximum power to affect price. At the other extreme, a market with so many sellers that no one of them could affect the price – termed “perfect competition” – is the best because it minimizes the price paid by the buyer.

This approach – with its implication that more sellers benefit buyers – fails to consider that sellers with many competitors have an incentive to differentiate their version of the product from those of other sellers. This creates the risk of a bad selection by a buyer, which may be avoidable only by incurring significant information costs.

The home mortgage market in the US is the case in point. More than 4,000 financial institutions offer home mortgage loans in the US but the price differences on identical transactions can be substantial. In making a selection, many borrowers follow the advice of their real estate agent/broker, who usually has little interest in the mortgage price. Others are swayed by advertisements in the media or on financial web sites; the cost of these ads are of course largely passed on to borrowers.

This article describes a new on-line network with implications favorable to borrowers, similar to those in the textbook version of perfect competition. It is called the Certified Mortgage Network (CMN) because the participating lenders are certified by Participating lenders, referred to as certified network lenders or CNLs, deliver their interest rates and discount points (together, these are the mortgage “price”) to the CMN every day, much as they have long done with their own loan officers. Unlike most financial web sites, the CMN does not charge CNLs for leads.

Borrowers using the CMN are presented with an easy to understand side-by-side comparison of loan options from all available CNLs. In addition, the pricing posted from CNLs is fully adjusted to account for borrower specific features of the loan (e.g. occupancy type, credit score, etc.) and is the best pricing from each lender.

Lenders who participate on the network as CNLs also benefit in several ways:

  • No lead fees. The only cost to lenders is the modest up-front cost of technical integration with the CMN system.
  • Reduced Marketing Costs. At the same time, CNL participants on the network avoid costly marketing expenses to generate leads from the CMN.
  • Borrowers are pre-qualified. Leads received from the CMN have already gone through the significant hurdle of pre-qualification; this results in higher conversion to closed loans.
  • Borrowers on the CMN are educated. Since the CMN includes many online resources for borrower self-education and potential borrowers have already price-shopped, leads from the CMN are more likely to close. Online tools for borrower education include a ChatGPT based chatbot trained on the Mortgage Retirement Professor’s extensive library of mortgage related content.

In summary, the CMN enables borrowers to achieve the “best pricing” that is the unfulfilled promise of perfect competition in the mortgage marketplace. And it does this within a private marketplace, avoiding the heavy burden of government regulation.

Jack Guttentag was 100 years old in December 2023. The co-author of this article – Allan Redstone – was his student at the Wharton School.

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