Mortgage shopper's dream come true

As noted last week, borrowers often make costly transactional mistakes because they know less than the loan providers they deal with, who are motivated to exploit their information advantage. A borrower who pays 5 percent -- when she could have gotten 4.875 percent if she had known what her loan provider knew -- has made a transactional mistake.

Borrowers make lifestyle mistakes for the same reason, and also because lifestyle decisions are often complicated and borrowers tend to overweight short-term benefits and underweight long-term costs. A borrower who refinances to reduce her payment at the cost of owing substantially more after five years may have made a very costly lifestyle mistake.

Lenders have no financial incentive to reduce borrower mistakes, and government efforts have been largely ineffective. This article will describe a private-sector initiative using a system based on advanced Internet technology that can eliminate the causes of borrower mistakes. I will call this system EQ.

The potential borrower -- I'll call him "Adam" -- logs in to EQ and fills out an information form that is a little longer than those found on other mortgage Web sites. EQ needs to know more about Adam because it calculates a cost of borrowing that is specific to him -- unlike the government-mandated measure called APR (annual percentage rate) that assumes "one size fits all."

I discussed the need for this kind of measure in a recent article and called it "time horizon cost," or THC. EQ also collects credit information about Adam from a credit bureau.

EQ gives Adam a listing of all mortgage programs for which Adam qualifies, listed in order of Adam's THC. EQ will also show the payment, which Adam must find affordable, and on adjustable-rate mortgages it will show the THC and payment on different assumptions regarding future interest rates so Adam can assess the risk of future rate increases.

This information is compiled for every individual lender on EQ's network, so in selecting the best mortgage Adam is also selecting the lender providing the best terms on that mortgage. EQ allows Adam to avoid transactional mistakes and lifestyle mistakes at the same time.

EQ has another piece of information for Adam that could prove invaluable. If the prices Adam qualifies for are not the lowest available in the current market, EQ will display the best prices and where Adam falls short. It could be too low a credit score, too much debt, too small a downpayment, insufficient cash reserves, or some combination of these.

This might induce Adam to take a detour, delaying the loan while working to improve his credentials. If he takes the detour, EQ will guide him on what must be done.

If Adam wants to go ahead, he requests the lender offering the best terms on the desired loan to lock the price. The lender might or might not be willing to lock based on the information about Adam provided by EQ. However, if the lender delays until all of Adam's information has been verified, the lock when issued will be at the prices prevailing at the time it was requested.

EQ maintains a price archive for this purpose. The borrower is thus protected against the common practice of delaying the lock until market prices change, then locking at the requested prices if the current market price is lower, and at the current price if it is higher. ...CONTINUED

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