"Is it harder to shop effectively for a mortgage than for a car?"
Shopping for a car is child’s play compared to shopping for a mortgage.
Price features of mortgages must be verified: Price always depends on the features of the product or service being priced. These are easy to define on a car, consisting of the brand, model number, extras and accessories. A car buyer can specify these and obtain consistent price quotes from multiple dealers.
In contrast, the list of mortgage features that affect the price is long, and all features must be verified by the lender, which takes time. Lenders will not invest the time until a borrower applies for a loan, which means that the consumer must commit to the lender without being sure that the mortgage specs that the lender priced are correct.
For example, let’s say a borrower wants to refinance a $200,000 loan on a property she claims is worth $250,000. But if the appraisal comes back at $230,000, it is a different mortgage carrying a higher price.
The quoted price on mortgages may not be valid: There is only one price on a car, the one quoted by the dealer to a potential buyer.
On a mortgage, in contrast, there are posted prices and quoted prices. Posted prices are those the lender will commit to ("lock") on a loan to a borrower whose loan specs have been verified. Lenders deliver posted prices to their loan officer employees every day, and sometimes more frequently.
The quoted price is the price the loan officer quotes to the borrower. It might be the posted price, but could be higher or lower for strategic reasons, as explained below.
Borrowers cannot depend on mortgage price quotes: The price quoted by a car dealer is an offer to sell that will remain open indefinitely. This means that car purchasers can almost always finalize a purchase at the quoted price.
The price quoted by a mortgage loan officer, in contrast, is not an offer to lend and is not binding on the lender until it is locked. By that time, it will probably be different because mortgage prices are reset every day with the market. A mortgage borrower, therefore, cannot depend on a price quote.
The multiple abuses that pervade the mortgage market stem from these differences.
Mortgage spec abuse: Lenders can use changes in mortgage specs as a screen that allows them to extract a higher price from the borrower. The most common abuse of this type today is with property value, which usually requires an appraisal that takes days or weeks to complete.
In the example given above, where the appraisal comes in lower than the borrower’s estimate by enough to affect the price, the price will be raised. But the borrower typically will have no way of knowing whether the price increase is consistent with the lender’s posted prices, or whether it has been padded. And if the appraisal comes in higher than the borrower’s estimate by enough to reduce the price, the borrower won’t receive the benefit of it.
Lowballing: This is the practice of quoting a price well below the posted price, with the intent of snaring the buyer as a customer. Lowballing pervades the home mortgage market because lenders being compared to other lenders usually have no other way to distinguish themselves. Lowballers have many ways to explain the higher price borrowers inevitably face after they are committed.
Lock abuse: Borrowers who select a lender based on a price quote, even if that quote was the posted price at the time it was given, are vulnerable to lock abuse. This is the practice of exaggerating market price increases, and minimizing price decreases that occur between the time of the price quote and the time the price is locked.
Probably the most pervasive lock abuse is ignoring a market price decrease that occurs between the last time the borrower was quoted a price and the time the price is locked. In that case, borrowers receive the price of the earlier quote, which in most cases is the price they expected, rather than the lower posted price, which is the price they deserve.
All the abuses discussed above involve strategic deviations from lenders’ posted prices. Mortgage spec abuse means a price adjustment larger or smaller than the adjustment called for by the model used to calculate lender’s posted prices. A lowball price is one quoted to a shopper that is below the lender’s posted price. A lock abuse is a lock price that is above the lender’s posted price at that time.
None of these abuses are prevented by the mandatory disclosures contained in Truth in Lending or the Good Faith Estimate. The remedy is to provide mortgage borrowers with direct access to the posted prices of mortgage lenders. Stay tuned.