How come you can call 5 different brokers/bankers on the same day, with the same information, and receive 5 completely different quotes? Good question. All brokers/bankers have access to the same rates and programs; the 5 different quotes represent 5 different cost estimates to obtain the exact same mortgage. The main variable being the broker/bankers personal compensation. What is really unnerving about it all is that without proper ‘glasses’ or an astute understanding of the mortgage industry; you are very likely NOT to choose the best of the offers you received. As my counterpart likes to say, ‘the mortgage industry is bent on keeping everyone deaf, dumb, and docile’. Sad, but true.
In 2003, while looking for services and strategies to improve customer service levels for my mortgage brokerage, I crossed paths with Bill Hilestaad. Bill was the brains behind a concept called ‘Everyday Wealth *TM’, a service that allowed consumers the ability to anonymously shop for credit cards and mortgages. The underlying business model of EW was something Bill called C2B, or Customer to Business.
The core of the concept was EW’s database would collect personal financial information and securely store it until you were ready to shop for a product/service. Some people initially balked at the idea of ‘giving up’ such private information for fear of misuse, but EW had a very sound answer/solution. They subsequently provided a monthly Equifax *TM credit report for subscribers to monitor, with tools and resources to insure their bureau was correct, maintained, and optimized.
‘Owning’ your info proves to be the best way to protect yourself from fraud and identity theft, as well as improving your all important FICO scores. Any ‘fishy’ activities could be identified and rectified before substantial damage was done. I fell in love with one of the fundamentals of the concept, ‘anonymous automated shopping’.
If you wanted to shop for a mortgage (or a credit card) you simply logged in and clicked to submit an application for a mortgage. The EW ’shop bot’ backed with your pre-filled and current personal data, farmed out your information to various lenders who then emailed back offers to your EW email account. The very cool thing was that the shop bot DID NOT release your name, address, phone number, social security number, etc. Instead it released pertinent financial and credit risk factors as a string of otherwise unintelligible and anonymous data to a lender, who then returned quotes/offers based solely on these non-invasive but crucial bits of information.
The C2B concept, along with the mortgage industry’s internal reliance on sheer objective data for qualification, erected the skeleton of an information bridge between consumers and direct lenders. This ‘bridge’ reduced the likelihood of deceptive marketing and predatory lending, as a human on the other side could not take advantage of an unwitting consumers relative lack of industry knowledge. The lender is compelled to present its ‘best’ offer or run the risk of pricing themselves out of a deal.
Let’s face it, broker/bankers, like any commissioned salesman, will base their ‘rip’ on perceived consumer’s relative savvy about the product being sold. A naive, question asking 60 year old woman in her Sunday dress will receive different terms from a used car salesman on the same vehicle when compared to a 30 year old male in a power suit who sets his price, even if they are both identical ‘on paper’. Same dynamic, different industry.
When working from an educated and anonymous platform, like say cars.com, the salesman loses his ability to hone in on the vulnerable consumer and prices level out accordingly. At some critical point, a consumer will ask themselves why use a ‘ data salesman’ and pay their ridiculous premiums? When was the last time you called a human stockbroker to check the price of Microsoft or inquire about the top performing Mutual Funds? How about a travel agent? Information based, Middleman Commission Sales jobs have a shelf life about as long as chicken.
As previously stated, the mortgage industry has internally (direct lenders) evolved to more ‘Automated Underwriting’ (AU) qualification interfaces. AU’s are web-based ‘engines’ that scrub approximately 9 credit and financial risk variables (Property Type, middle FICO, Property Value, Loan Amount & Type, Income Amount & Type etc) against their catalog of mortgage programs and underlying qualification criteria to generate an accurate ‘pre-qualification’.
Direct lender AU’s are currently only available to a broker/banker, as they yield wholesale rates and pricing. Note: There are a growing number of retail lenders that offer AU type interfaces, but are pre-programmed with inflated rates and fees. Don’t mistake a retail AU for a wholesale AU.
When a consumer calls or visits a broker/banker they will typically ask for all personal data (name, address, SS#, phone) as well as the ‘risk variables’ required for an AU decision. The broker/banker will submit the consumers anonymous risk variables to one or many direct lender AU’s, and receive back the corresponding rates and pricing in about 10 seconds. However, the broker/banker, almost without fail, will NOT disclose this wholesale information to the borrower. Instead they will ‘mark-up’ the interest rate and fees based on their ‘feel’ of the consumer’s tolerance level. In other words, they will increase the rate and charge as much in fees as they think they can get away with.
This is where salesmanship and the middle man shenanigans begin, causing the 5 different quotes from 5 different broker/bankers. How they hide fees and otherwise make money is a discussion for a future post. What this all dials down to is that mortgage pre-qualification has been reduced to submitting a string of ‘anonymous’ digital data to an automated web based interface that returns wholesale results in 10 seconds. Considering all of the current legislation and federal investigations regarding mortgage fraud, deceptive marketing, and predatory lending practices that are the norm, not the exception within the mortgage industry, consumer direct access to wholesale lender rates and pricing via AU web-based interfaces prior to choosing a broker/banker can eliminate these ‘issues’.
In a transparent, Customer-2-Business mortgage industry, broker/bankers must evolve into honest and efficient liaisons who simply verify and validate an educated consumers spoken word against lender documentation requirements. Passing new laws, tightening RESPA, and trying to police a vast and fragmented industry lacks in theory, let alone does little to stop the gaping wound that bleeds even the savviest of consumers out of untold amounts of money.
Giving consumers direct, anonymous access to the information that is used against them is the prevention and cure to the pandemic mortgage problem.
I don't care who's handling your mortgage or how much you trust him, if you don't know what PAR rates are or how much he/she id being paid, YOU ARE A FOOL. Odds are, you've never been quoted the actual rates/terms you qualify for and have no idea how much your loans are really costing you. Why? Because the system is broken. Lenders pay brokers a handsome commission for selling you interest rates that are higher than what you really qualify for (above PAR). It's called yield spread premium (YSP) and it's just one of many ways the industry turns your money into their money. The law requires brokers to disclose YSP, but it's usually beyond the average consumer's ability to detect it. Bankers, on the other hand, don't have to tell you—which is why knowing your PAR rate is so important. Without it, there's no way to figure out what your loan is really costing you, both short and long-term.
