When Banks Compete, You Lose

by Morgan Brown

Mortgage Banker

Author website

Brian Brady wrote a great series of articles on how to obtain the best mortgage loan by shopping for a mortgage originator first, and then the loan second. His brilliant advice is a bit counter-intuitive but dead on. If you are considering shopping for a mortgage by using the internet, keep his advice in mind as you read the rest of this post.

My company primarily uses internet leads for new business. Of our approximately $12 million a month in loan originations $4 million comes from repeat and referral business and the rest comes from new business originated by internet leads. We spend about $30,000 per month on internet leads and get about 4 to 1 on our marketing dollar. I like to think we’ve figured out how to win business while competing with other banks. We use the big boys like LowerMyBills.com; but have stayed away from LendingTree.com — we don’t want to have to pay the lead provider off the HUD at closing.

There are a lot of misconceptions about internet leads both from the consumer and the industry side. We’ll focus on consumers in this post. For more in-depth information on the subject please read my Zillow Real Estate Guide article on 6 things you should know before shopping for an interest rate online. To summarize here the 6 things:

1. Plan on getting a lot more than 4 calls from the 4 lenders that are supposed to compete for your business — get ready for a ton of calls.
2. Plan on drinking from the mortgage information “fire hose” while different lenders pitch their products and expertise.
3. Be prepared to spend some serious time on the phone.
4. Don’t just go for the best up-front offer, keep some contingency offers in your back pocket.
5. If an offer is too good to be true, it probably is.
6. Know who you are working with.

But even before you read these 6 things, read Brian Brady’s post. When you shop online for an interest rate and fee quote INSTEAD of shopping for the mortgage professional first, you are opening up yourself to be the victim of bait and switch tactics. Think about this for a moment — if you don’t pick a loan originator that you are comfortable with first and just worry about fees and rate the unsavory loan officers are going to attract your interest. They have no scruples when it comes to quoting you something that is too good to be true. So by focusing on the factors you are worried most about you are pre-selecting those individuals that are most likely to lie to you. You probably will cast aside the honest individuals as “too expensive” or having an uncompetitive interest rate. When you demand no closing costs or the lowest rate first you are asking originators to stretch and over-promise to win your business. This often results in the all-to-familiar under-deliver when it comes time to sign your loan documents.

If instead you shop for your mortgage professional first and then start talking mortgage programs with the people you feel comfortable you’ve chosen to conduct business with you will end up with a good deal that is realistic. Plus it will come from someone providing honest service. The best way to ensure you’re getting a good loan is to ensure you’re working with a good person first.

If you choose the route of going for the lowest closing costs and best interest rate here are some of the problems you’ll run in to:

1. Bait and switch — rate, fees, terms all change from GFE to close
2. Non-disclosure — loan originators telling you what they are offering with out providing proper up-front GFEs and other disclosures
3. Property over-valuation — originators inflating your property value to push down the quoted rate
4. Rate buy downs — excess fees charged as discount points paid to the lender to get you the lowest rate possible
5. Short-locks — loan originators locking your loan for 15 days to improve their offered pricing; then reneging on the offer when the lock expires early
6. Adjustable products pitched as fixed loans — ARMs and negative amortizing loans pitched as fixed rate products

By choosing the person first you should be able to alleviate many of the above problems that can arise by simply focusing on the wrong aspects of the transaction at the very outset. While the tag “banks compete, you win” is catchy, it’s also very dangerous. Let the originators compete based on their personal and professional merits and qualifications first — then bring the products in to equation.