Is Mortgage Shopping Too Quick?

Is mortgage shopping too quick?Has mortgage shopping become too quick and easy? Or, are speedy mortgages a good thing, evidence that automated loan services are a growing success, making it easier to get financing with fewer hassles?

“On average,” reports Zillow, in a just-released study, “Americans spend just eight hours researching their home loan, and obtain just four quotes from lenders.”

In a sense there’s good news here: People are getting at least four quotes before selecting a lender.They are shopping around — but are they shopping around enough?

According to Zillow, “one in five (18 percent) of those surveyed spend an hour or less shopping for their home loan. More time is spent researching a car purchase (11 hours) and an equal amount of time researching a vacation (8 hours), despite the fact that these items cost just a small fraction of the average cost of a home. For example, the average home costs five times more than the average car and 80 times more than the average vacation.”

Surely it’s true that houses cost a lot more than cars or vacations. That said, are speedy mortgage applications in and of themselves really a problem?

For instance, I would be far more concerned if borrowers were both getting quickie mortgages and not shopping around, if they only checked with one or two lenders.

Mortgages Vs. Auto & Truck Financing

The fact is that auto loans and mortgages are very different financial creatures. One huge reason is that real estate financing is governed by Wall Street Reform while auto dealers have a consumer-oversight exemption.

The Center for Responsible Lending explains that “the auto dealer lobby successfully fought to receive a special exemption in the House from the rules of the Consumer Financial Protection Bureau (CFPB) in the financial reform bill even when the dealers act as creditors and brokers on car loans. But fair, honest and ethical competition requires a level playing field, as well as a fair and consistent system for accountability.

“There is widespread agreement,” it continues, “that there should be no carve-out for auto dealers. In addition to consumer and civil rights groups, the Department of Defense, the Military Coalition, the Credit Union National Association, and the Independent Community Bankers Association all oppose any amendment to the base text to give the auto dealers a free ride from CFPB’s consumer protection rules.”

There’s an argument to be made that mortgage shopping today is quick, speedy and boring — precisely what borrowers and lenders should want. How come? If you’re a borrower you don’t want the toxic loans and gotcha clauses that were central to the mortgage meltdown. And if you’re a mortgage lender you don’t want the foreclosures and litigation which have devastated the financial system.

The National Association of Realtors says that at the end of last year 98.5 percent of all real estate loans were qualified mortgages. “Qualified mortgages” under Dodd-Frank are loans which meet certain criteria. For instance, no balloon financing is allowed, prepayment penalties cannot last more than three years, and lender fees and points for financing above $100,000 are limited. Why would lenders make such loans? Because when they originate qualified mortgages (QMs) they have virtually no liability.

In contrast, how many people search for financing before they shop for a car? What percentage of auto sales are dealer-financed events where the rules don’t apply? How many consumers know about the carve out?

The truth is that it is today easier and better to shop for a mortgage because Wall Street Reform has brought an element of certainty to the system. It’s the borrower’s job to shop around, something made faster through automated systems and lots of electrons. In turn, it’s the lender’s job to properly underwrite the loan, to assure that only those with an ability-to-pay received financing.

No one would suggest that Dodd-Frank is perfect in every way — or in any way — but it’s increasingly seen as a middle ground, a place with little risk.

Little risk, in turn, means investors worldwide want to lend in the US marketplace — one reason mortgage rates are near historic lows. Moreover, lenders have fared pretty well under the new rules: the Mortgage Bankers Association reports that profits per loan averaged $1,189 in 2015, up from $747 in 2014.

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