My last column discussed homeowners carrying a mortgage rate above the current market rate who could refinance profitably but haven't - for reasons that don't make sense. Now we'll discuss how those who do intend to refinance or finance the purchase of a home can find the best possible deal.
POSTED PRICES ARE KEY: Mortgage lenders every morning reset their "posted prices," which are the prices they will commit to at that time to a borrower who meets their qualification requirements. On a given transaction, posted prices will vary from lender to lender, and in a well-functioning market, the shopping borrower would find the lender posting the best price and grab it. But that turns out to be quite difficult to do.
The problem is that posted prices are not public information. Lenders deliver them to their loan officers, brokers and others authorized to offer their loans to the public. But these agents are not obliged to quote posted prices to mortgage shoppers, and in many cases they do not.
Agents looking to snare the shopper as a customer may price below the posted price, called low-balling. It is a common practice because it is often the only method available to the agent to separate herself from the others. After the customer is committed, the agent may price above the posted price, known as high-balling, to increase the profit margin.
If the market price subsequently declines, the shopper will receive the early price quote instead of the new, lower posted price. If the market price increases, the shopper will pay the new posted price or higher - probably with an explanation and perhaps even an apology.
WHY LOW-BALLING WORKS: Agents can't be held to the prices they quote to shoppers because market prices will change before the price is locked. The information provided by a borrower, upon which a price quote depends, must be confirmed by the lender before the price is locked. Validation of some features, such as credit score, is quick. But others, including property value, usually take days to complete and sometimes weeks. While the applicant is waiting for the lender to validate her information, the posted price is likely to change with changes in the market, making the early price quote obsolete.
WHY HIGH-BALLING WORKS: The typical applicant has no way to know whether or not she is getting the lender's posted price at the time the price is locked. By that time, the applicant may be committed to the transaction, having invested in an appraisal that is not transferable to another lender, and possibly having paid other fees as well. Indeed, if the transaction is a home purchase with a firm closing date, there may not be time to start the process again.
To avoid low-balling, mortgage shoppers must have access to the posted prices of the lenders being shopped. This assures that their selection of the lender with the lowest price is correct. To avoid high-balling, they must have access to the posted prices of the lender they have selected when that lender locks the price. This assures that they are receiving the correct price.
The only way that shoppers can compare posted prices of competing lenders, and check that the locked price is the posted price, is to access a multi-lender website that obtains the posted prices of participating lenders for disclosure to shoppers in real time. There are three: MortgageMarvel.com, Zillow.com and MtgProfessor.com, which is mine.
Don't confuse multi-lender sites with lead generation sites, such as LendingTree.com and LowerMyBills.com, which do business with hundreds of lenders. These sites do not collect price data from lenders. Rather, they collect shoppers' financial information, which is sold to the three or four lenders who will pay the most for it. The shopper remains completely vulnerable to low-balling and high-balling by those lenders.
ABOUT THE WRITER:
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
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�2013 Jack Guttentag
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