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posted: 7/2/2011 12:01 AM

Mortgage Professor: Mortgage lender ratings under fire

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Q. How much credence do you place in the 1- to 5-star ratings of lenders that many online mortgage sites provide based on reports from borrowers?

A. Very little. For one thing, borrower ratings are based on a single experience covering a complicated process extending over several weeks. A good restaurant reviewer returns to a restaurant being reviewed four or five times, but a mortgage borrower is limited to one exposure, which might or might not be typical or representative.

Basing a judgment on only one unit of experience would not be that large a handicap if the borrower were well equipped to make an informed judgment, but many -- if not most -- are not. While most restaurant reviewers know a lot about food preparation, few mortgage borrowers know much about mortgages when they begin the process. This makes their interpretations of what transpires vulnerable to misperceptions.

Here is an example: A borrower receives a price quote of 4.5 percent at 1 point on a 30-year fixed-rate mortgage, and requests the lender to lock that price. The lender won't lock, however, until it has received some additional information, which takes several days to obtain, during which period the market changes. This is a common occurrence today because underwriting requirements are tight and enforced.

Now consider two possible scenarios. In scenario 1, the new market price is higher at 4.5 percent and 2 points, so the lender gets back to the borrower to report the new price, and asks if the borrower wants to lock 4.5 percent and 2 points. In scenario 2, the new market price is lower at 4.5 percent and zero points, and the lender locks the price of the original quote, 4.5 percent and 1 point.

How would the borrower evaluate the lender in these two cases? In my experience, the borrower in scenario 1 would probably be displeased because the price requested was not received; the borrower might even allege that the lender pulled a "bait and switch." The borrower in scenario 2, in contrast, would very likely be content because the price requested was the price received. Yet the lender in scenario 1 played it straight and gave the borrower the correct price while the lender in scenario 2 cheated the borrower by not passing through the price drop.

Borrower reviews also suffer from ambiguity regarding whether they apply to the lender firm or to the particular loan officer with whom the borrower worked. Loan officer A working for firm X might be great, but loan officer B also working for X might be a dud. There is much to be said for assessing loan officers rather than firms, and Zillow allows both on its listings. Lending Tree, on the other hand, lists firms only.

I do think that borrowers can do a pretty good job of assessing important qualities of loan officers, such as helpfulness, promptness in returning calls, willingness to answer questions, accessibility when needed, and so on. On the other hand, some loan officers con borrowers into thinking they are great when they aren't.

Before the Internet and the star-rating system came into being, I knew a loan officer who was enormously successful, made a seven-figure income, but placed every borrower in a 3/1 adjustable-rate mortgage. He believed it was the best instrument for everyone, and he was an extremely persuasive salesman. By my standards, he was a bad loan officer because one mortgage type cannot possibly be best for everyone, but he would have had a 5-star rating from borrowers.

The final and perhaps the strongest argument against placing any credence in borrower reviews is that the reviews can be and are manipulated. "Ringers" are employed to generate favorable reviews of the employer and negative reviews of competitors. Actual borrowers providing negative reviews are bribed to remove them. My guess is that such manipulations are most prevalent on the sites that list loan officers rather than or in addition to firms, but I have no evidence to back this up.

• Contact Jack Guttentag via his website at