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posted: 11/26/2011 12:01 AM

Mortgage Professor: Choice is power when shopping for mortgage

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Mortgage lead generation websites -- or LGSs -- have become a major part of the home mortgage distribution system. LGSs collect information from potential borrowers visiting the sites, and sell it to mortgage lenders.

There are dozens of LGSs, perhaps hundreds; nobody keeps a count. The two largest LGSs are LendingTree.com and LowerMyBills.com.

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How lead generation sites work

An LGS attracts borrowers to its site primarily by promising to provide mortgages at attractive rates with one-stop shopping.

A prospective borrower visiting an LGS fills out a questionnaire covering the loan request, property, personal finances and contact information. The completed questionnaire is the lead that is sold to lenders.

Each lender participating in the site fills out a form indicating the features of loans they are looking for. This "filter" covers credit score, loan size, loan-to-value ratio, property ZIP code, type of property, and other factors. The LGS sells a lead with a given set of features only to lenders who have indicated that they want those features.

In general, LGSs sell leads to the lenders who will pay the most for them, subject to volume-based discounts. The sites commit that they will not sell the same lead to more than three or four lenders, but skeptics abound.

Lead generation sites from a lender perspective

Lenders view LGSs as one more way to market themselves. They can advertise online and in a variety of media, hire more loan officers to solicit business from real estate sales agents, invest in affiliated business arrangements with title agencies or others that will refer customers to them -- and they can buy leads. While each approach has its advantages and disadvantages, for many lenders the purchase of leads appears to be a relatively attractive option for some part of their marketing budget.

Lead generation sites from a borrower perspective

Perhaps the major question of interest to borrowers is whether an LGS will help them shop effectively? Relative to the ways many, if not most, borrowers look for a mortgage, the answer is "yes." Borrowers who would otherwise respond to an advertisement, accept a referral from a real estate sales agent, follow the recommendation of another borrower, or randomly select lenders from the yellow pages might well do better using an LGS. It is quick and easy; the lenders sent by the LGS are interested in the loan; and there is no reason to believe they are any worse, or any better, than the lenders the borrower would contact elsewhere.

Relative to shopping with an Upfront Mortgage Broker (UMB), however, the LGS falls short. Selecting a UMB is as easy as selecting an LGS, and the UMB has access to three or four lenders, sometimes more. The major difference is that the UMB helps the borrower identify the best deal offered by competing lenders and the LGS doesn't.

The LGSs pretend that selecting the best deal from three or four lenders is like selecting the best price from three or four car dealers, but it isn't. Once the specs of a car are defined, there is a single unambiguous price that the buyer can almost always rely on. The mortgage price, in contrast, has two dimensions -- interest rate and loan fees -- and adjustable-rate mortgages have several more. Part of a UMB's job is to help borrowers sort through the pros and cons of different combinations of interest rate and fees available from different lenders. With an LGS, the borrower is on his or her own.

Furthermore, mortgage price quotes are not binding on the lender until they are locked, which encourages some lenders to "lowball" -- quote a mortgage price below the price the lender has any intention of delivering. If a price-shopping consumer is a lead purchased from an LGS, the lender knows its quoted price will be compared to the quotes of two or three other lenders. This makes the temptation to lowball very strong.

While brokers may also lowball, UMBs don't. UMBs are committed to negotiating their own fee in advance with the borrower, which means that they have nothing to gain by pretending the lender price is lower than it is in fact.

Shopping Upfront Mortgage Lenders (UMLs) is another good alternative to using LGSs, but only for borrowers who are prepared to do the extra work involved. Instead of being solicited by lenders selected by the LGS, the borrower shops among seven lenders who post complete prices on their websites. Their commitment to complete pricing and anonymous shopping by users is part of the UML certification. Borrowers have an easier time comparing prices of different lenders when all the lenders show all the interest rate/fee combinations they offer. And UMLs cannot lowball because their real prices are always on display.

• Contact Jack Guttentag via his website at mtgprofessor.com.

$PHOTOCREDIT_ON$ 2011, Inman News Service$PHOTOCREDIT_OFF$

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