(This is Part 3 of a three-part series. See Part 1 and Part 2.)
Mortgage leads are packets of information about consumers who loan providers (hereafter “LPs”) hope to convert into borrowers. Most leads are generated by specialists in the business through attractive (and frequently deceptive) ads on the Internet. Consumers who respond to the ads by filling out a questionnaire become marketable leads who are solicited by the LPs (brokers and lenders) who buy them.
In two previous articles, I argued that there are no benefits to borrowers in the development of the leads market because the lead generators (hereafter “LGs”) accept no responsibility for the actions of the LPs. Indeed, since predatory LPs are more dependent on leads than others, borrowers responding to solicitations have a larger-than-average probability of hooking up with a predator.
A Different Approach to Lead Generation
But it doesn’t have to work that way. An LG could elect to deal only with LPs who commit to follow well-defined standards of behavior, and allow themselves to be monitored by the LG. This is a more costly way to operate, and the LG would have to negotiate deals with each LP, but the payoff would be substantial.
The LG, instead of attracting leads through glitz and deceptive promises, could offer real guarantees regarding the operations of the LPs. Since the lead provides a benefit to the borrower, more borrowers would sign up, and a larger proportion would convert themselves from leads to borrowers.
I am developing such a deal as I write this. I will be the LG, and the first LP will be an online lender with a strong interest in finding a credible way to assure its customers that they will be fairly treated.
Wholesale Prices and Markups
Like automobiles and television sets, home mortgages have wholesale prices. These are the prices quoted by a small number of large lenders or “wholesalers” to the many thousands of smaller lenders and brokers who deal directly with borrowers. Like automobile dealers, retail loan providers formulate their own price to the borrower by adding a markup to the wholesale price.
Wholesale Price + Loan Provider’s Markup = Price to Borrower
Like automobile dealers, mortgage loan providers don’t ordinarily disclose their wholesale prices because that reveals their markup, which is their gross profit on a transaction. The LP I am dealing with will be the first mortgage lender to deviate from that practice.
This LP will disclose its wholesale prices and markups to its customers. It will agree to set markups based solely on loan amounts, not with the borrower’s credit, down payment, type or location of property, or anything else.
How Uniform Markups Will Protect Borrowers
All the abuses to which borrowers are subjected have the objective of increasing the loan provider’s markup. Here are three of the most common:
Overcharging: Many loan providers charge what the market will bear, which means that borrowers who are naive and trusting and don’t shop alternatives will pay higher markups than knowledgeable and aggressive shoppers.
Market Niche Misclassification: Borrowers are sometimes classified as belonging to a higher-risk category than is, in fact, the case, which increases the markup. Borrowers who are erroneously classified as sub-prime get whacked twice, since the wholesale prices on sub-prime loans are higher, and markups are also higher.
Price Low-Balling: Loan providers sometimes deliberately quote a very low price in order to “hook” borrowers who are shopping. Later on, the low price disappears because (allegedly) the market changed, or the lender discovered fees that were not mentioned before, or for a dozen other reasons.
If the LP’s markup on a loan of given size is disclosed to the borrower then there can be no tricks. The borrower who is a smart lion and the borrower who is a naive lamb will pay the same markup. Of course, their wholesale prices could be different, which would result in a different price.
I will guarantee the borrowers who go to the LP’s site through my site that, unless the loan amount changes, the markup on the loan they price will be the markup they will pay at closing. I will have the right to audit any transactions in which borrowers claim that they had not been treated fairly. The LP will pay me to assume this function.
Stay tuned.
The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://mtgprofessor.com.
