A new rate comparison tool from the Consumer Financial Protection Bureau is intended to help borrowers who rely too much on a single lender and don’t comparison shop enough.
On Tuesday, the CFPB released Consumers’ Mortgage Shopping Experience, a report based on
a survey conducted by the CFPB and the Federal Housing Finance Agency.
The study focused on 10 questions answered by approximately 2,000 survey respondents who closed on purchase financing during 2013.
According to the report, nearly half of borrowers failed to shop around before they applied for a mortgage. This was most prevalent among consumers who valued lender or broker characteristics more than loan terms.
“Specifically, the survey found that among all borrowers — those who shopped and those who did not — 42 percent said having an established banking relationship with the lender is ‘very important,'” the CFPB said in a news release. “Since most borrowers likely only have a few banking relationships, this likely inhibits shopping.”
Local offices or branches were very important to 40 percent of survey respondents, and 17 percent considered an online presence very important. Consumers
who didn’t place much value banking relationships or local offices, however, were 40 percent more likely to shop, while the share jumped to 70 percent for those who placed no value on those characteristics.
But the CFPB didn’t appear to place any value on a mortgage firm’s ability to close a loan.
As any originator or real estate agent is aware, a slightly higher rate on a closed loan is far more valuable than the promise of the lowest rate from a lender that can’t get the deal done.
A failed closing could wind up costing the borrower far more if home prices or interest rates are rising.
Borrowers who were confident about their understanding of the mortgage process were more likely to shop around, according to the CFPB. Also more likely to shop were first-time home buyers — likely reflecting inexperience with varying closing ratios between lenders.
The CFPB noted that borrowers who don’t shop around are throwing money away.
Gabe Dalporto, who is the president of mortgage at LendingTree LLC, said in a written statement that the more offers a consumer receives, the better their deal is.
“On average, the difference between the best and worst rate for a consumer who gets two offers is 0.24 percent,” Dalporto explained. “So just by comparing two separate lenders, a consumer can save thousands of dollars over the life of a loan. But if they compare five offers, a consumer on average will see a 0.51 percent difference between the best and worst offer.
“That’s up to twice the savings just by shopping around.”
In addition, the CFPB’s report indicated that three-quarters of borrowers only applied with one lender or mortgage broker instead of completing applications with multiple lender to find the best deal. Of those who applied with multiple lenders, more than a third did so because they were concerned about qualifying, while more than a fifth noted that they had actually been turned down on a previous application.
Another finding was that 70 percent of borrowers relied on their lenders or brokers to obtain most mortgage information. A third said they heavily relied on real estate agents for mortgage information, and just 2 percent looked to housing counselors.
“While lenders and brokers can be valuable resources, they have a stake in the selling of the mortgage, so what is best for the lender or broker is not always best for the consumer,” the CFPB said.
The
chief executive officer of NAMB – The Association of Mortgage Professionals, Don Frommeyer, seemed to agree with the CFPB. He said that mortgage shoppers should
avoid trusting the first credible opinion they receive.
“A mortgage broker’s main responsibility is to provide a number of alternative options in order for the home buyer to get the best possible mortgage and to secure their dream home,” Frommeyer said in a written statement.
The CFPB hopes to combat mortgage shopping deficiencies with its
release of a suite of tools dubbed Owning a Home. In addition to educational resources, the suite includes a Rate Checker tool that enables consumers to utilize the same underwriting variables that lenders use on their internal rate sheets.
“This is different than other websites that usually quote rates using averages for borrowers with great credit and a large down payment,” the CFPB said.
The regulator noted that first-time home buyers are
slightly more likely to rely on websites that have mortgage information.
Data for the Rate Checker tool is collected daily from financial institutions that represent about 80 percent of the mortgage market, according to the bureau.
Prospective borrowers input their credit score, location and desired loan program to see rates being offered. In addition,
a graph is presented indicating how many lenders are offering each rate.
Shoppers are also given the amount of life-of-loan savings they will see at varying rates.
Consumers can vary the down payment amount or credit score to see the difference in mortgages costs.
“Knowing the rates lenders are offering to consumers in a similar situation — buying a home of equal value, in a comparable area, with the same credit score — enables a consumer to enter conversations with multiple lenders armed with greater information and prepared with better questions,” the CFPB said. “Owning a Home also demystifies mortgage jargon, so consumers can have conversations with lenders more confidently.”
Dalporto, who applauded the CFPB for encouraging comparison shopping and pricing transparency, said that LendingTree created a pair of tools during the past two years very similar to the CFPB’s tool except that LendingTree’s displays specific lenders and their specific offers to the consumer — enabling immediate contact to the lender with the lowest rate.
One of LendingTree’s tools, Mortgage Negotiator, lets prospective borrowers who already have an offer in hand search for a better deal. The second tool, Loan Explorer, provides consumers don’t yet have an offer with simultaneous live offers from up to 20 different lenders.
“We find that rates on Loan Explorer are among the lowest in the industry,”
Dalporto said.
Finally, the CFPB’s tool provides information about what short- and long-term steps can be taken in order to obtain lower interest rates.
