When Banks Compete, You Don't Win

Everybody by now has heard the ads for the internet mortgage shopping sites, but what few know is how these "services" actually work. 

When you go to one of these sites and complete a loan application several things happen, and none of them are good.  These sites are not lenders themselves, they are actually expensive middlemen.  After they get your information, they turn around and sell it to lenders.  The fees they charge lenders for your information is so high that the lenders cannot give you a good deal on your mortgage. 

There are several different payment models out there, but all are ridiculously expensive for what a lender receives.  Some of these companies charge a setup fee as high as $25,000.00, plus a per lead fee, plus a several hundred dollar fee for every loan closed.  By the time you add up all the fees, the additional costs are very close to what I make on a loan.  In other words, if I bought your lead from one of these companies and priced it as I normally do, I would make little or nothing on your loan.  Therefore, I would have to charge you twice as much or increase your interest rate to make my normal profit on your loan.

The other common payment model is a payment per lead, sometimes with a substantial setup fee.  The payment per lead is usually around $20.00 to $35.00 per lead.  That doesn't sound like much until you consider that only 1-3% of those leads typically result in a closed loan.  A lender's cost per closed loan just for the leads then is anywhere from $666.67 to $3,500.00 per closed loan!  Guess who's ultimately paying the cost for those expenses.  As with any business the costs get passed on to the customer, which is why such a small percentage of those leads actually close. 

You are probably thinking now that it doesn't hurt to at least try one or more of these sites to see if you can get a better deal, but you are wrong. 

First, your phone is going to start ringing off the hook because the site is going to sell your information to as many lenders as possible.  They do get paid after all by every lender they sell your lead to.  If you have nothing better to do, than go for it.  If your phone doesn't start ringing, it is because the company you contacted owns a lender and has only sent your lead to that one lender (this could happen if you have excellent credit, employment, etc.), but that isn't what you went there for now is it ?  Which is why that company is being sued for deceptive trade practices.

Second, the people calling you are going to be trying hard to get your business, and some of them are, shall we say less than completely honest.  To get your business they are going to quote you ridiculously low rates and fees.  If you're refinancing you can probably go ahead and see what happens, which is at some point your lender is going to change the terms of your loan (and the change won't be for the better) while giving you some reasonable sounding, but completely false explanation for the change.  Much to your chagrin this change may only be apparent if you actually read your closing documents, many people don't, and they wind up stuck with terms much worse than they thought they were getting.

If you are refinancing this is no big deal, you can just get up from the closing table, walk out, forfeit the $600.00 or so nonrefundable fee they charged you in advance, and call a reputable lender to handle your refinance.  Unless of course you consider losing $600.00 a big deal, in which case you might not want to see what happens.

However, if you are purchasing a home the situation is a little different.  Nobody is going to be amused if you walk out of the closing.  The seller whose possessions are on a moving van on the way to their new home is going to want your head on a stick, the Realtors who were counting on the commission check to make their own house payment will be volunteering to make the seller's dream come true, and that friendly loan officer sitting in an office 6 states away is not going to be answering the phone or returning messages. 

You are either going to have to sign what you have in front of you, or have the guts to tell all these angry people that you will see them in two or three weeks, which will be the soonest you will be able to get another lender to close your loan.  Maybe you're different, but I've never heard of a buyer walking out in a situation like that.  If you're purchasing a home, you better get it right the first time, so you should probably go with a lender that depends on referrals from happy clients rather than one that buys leads off the internet.

Finally, your lead is going to keep getting recycled for months.  That means that not only will the phone calls continue, but lenders may continue pulling your credit report for months.  I've actually heard of borrowers getting so many inquiries spread out over an extended period of time (all mortgage inquiries in a 14 day period count as 1 inquiry, so shopping isn't necessarily bad if you do it right) that their credit score dropped significantly. 

In fact, one of my own clients did this to herself by spending a year shopping for a mortgage.  When she originally came to me her credit score was over 650.  Unfortunately, she didn't like what I could offer her, and she spent the next year going to every lender imaginable shopping for a better deal.  Almost all her applications were put in more than 2 weeks apart, so when she came back she had over 20 inquiries and her credit score had dropped to 550 or so, even though she had no derogatory information on her credit report that wasn't there the year before.  She was even less happy with what I could do for her then.

When banks compete, you lose.  If you don't believe me go to this site http://rss.epinions.com/rss/linkin_id-8003929/product-5585146752 and read the feedback about Lending Tree.  The last time I checked almost none of it was good.  If you want the best deal call the lenders directly and get quotes, only contact reputable companies, get it done within a 2 week period, and if it sounds too good to be true, it probably is.

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