Last week, the Consumer Financial Protection Bureau issued a breakdown of an important consumer behavior report. The National Survey of Mortgage Borrowers was completed by over 1900 homebuyers last year. These surveys asked approximately 100 questions covering the entire mortgage process, from when the consumer first started shopping for a mortgage, all the way through closing. Findings of the survey say that the overwhelming majority (77%) of first-lien mortgage purchasers only ever fill out one application.
Survey Key Findings:
- Almost half of consumers who take out a mortgage for home purchase only seriously consider a single lender or mortgage broker before choosing where to apply. Shopping is somewhat higher among first-time homebuyers, but not by much.
- Borrowers rely primarily on their lenders, brokers and real estate agents for information on the mortgage lending process. Far fewer consumers obtain information from outside sources, including friends, family, co-workers, housing counselors and even the web.
- Most consumers report being “very familiar” with types of mortgages, available interest rates, and the process of taking out a mortgage. Those who are “unfamiliar” with the mortgage process are less likely to shop are more likely to rely on real estate agents and personal acquaintances.
- A large number of borrowers report that factors NOT directly related to mortgage cost – including a previous relationship with a particular lender or broker, the lender or broker’s reputation, or even geographic proximity – are “very important” in their decision-making. Borrowers who express these preferences are “much less likely” to shop.
How much do consumers shop?
Apparently, not much. 77% percent only applied to one lender. First-time homeowners are slightly more likely to apply to more than one. The survey found the most common reason for shopping was to find the best deal. 5% of consumers that applied to multiple lenders did so because they had been turned down elsewhere. CFPB concludes in the report that a large amount of consumers ARE NOT getting the best mortgage possible due to lack of shopping.
How familiar are consumers with the mortgage process?
51% of consumers say they are “very familiar” with the process, start to finish. 14% say they are not at all familiar. Most consumers were most familiar with their own credit score and history, while only 49% said they were “very familiar” with the amount of money they would need for closing. 14% said they were “completely unfamiliar” with closing amounts. 25% of first-time homebuyers said they were “completely unfamiliar” with the process. The report found that the less familiar the consumer is with the process, the less likely they are to shop. For example, consumers who had researched available interest rates were almost twice as likely to shop as those who were unfamiliar.
Where do consumers go for sources of information on getting a mortgage?
The study found that 70% of consumers used their lender or broker as their main source of information on taking out a loan. 33% said they used their real estate agent as the primary source. Only 20% of borrowers said they used the web as a source of information “a lot.” Even fewer used friends, personal contacts, or financial planners. Less informed consumers tend to rely on personal acquaintances and real estate agents far more often than consumers who called themselves “very familiar” with the process. CFPB speculates this might be because those types of sources can provide information in laymen’s terms.
What do consumers look for in a lender/broker?
The three most important characteristics for the borrower are:
- Having an established relationship with the lender/broker. (42% said this was very important.)
- “A local office nearby” is very important for 40% of borrowers.
- Reputation of the lender/broker is very important for 41% of borrowers.
Consumers who had a prior relationship with a bank or lender – or were located near one – were much less likely to shop around than those who did not.
This analysis doesn’t attempt to evaluate the extent to which shopping improves outcomes – like fewer delinquencies and foreclosures, for instance. But they’re working on getting that data as well.
So, why do so few people shop around for a mortgage (even though it might benefit them financially), preferring instead to borrow from a bank or institution they have an established relationship with, or one that is conveniently located?
A recent piece on National Public Radio suggested this pattern in consumer behavior may be explained by consumer math skills. Specifically, many consumers may not understand how compound interest accrues over the life of the loan.
The CFPB report suggests a simpler explanation – people simply prefer going to their neighborhood lender/broker, or going to the bank they’ve already established a relationship with.
What does this data mean for brokers, lenders, and banks?
Solidifying a presence in your community may be the best way to drum up business. Making yourself available to the consumer as an resource for information can be an invaluable tool – the report clearly suggests consumers prefer this method of deciding on a mortgage provider to any other.
What does this data mean for consumers?
Shopping around may be in your best interest, especially if you are new to the mortgage process, and finding someone who will take the time and effort to get you the best loan available may require more than one pit stop.
Part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act, Sections 1098 and 100A) directed the CFPB to combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth-in-Lending Act and the Real Estate Settlement Procedures Act. Effective August 1, 2015, the integrated mortgage disclosures rule goes into effect.
Part of the new rule, will change the terms mortgage industry professionals use and the forms consumers will receive during the loan application and loan closing. The Good Faith Estimate, Truth-in-Lending Disclosure and HUD-1 Settlement Statement will be eliminated from the loan process and replaced with the Loan Estimate and Closing Disclosure forms. In addition, new terms will be included in the forms; Total Interest Percentage and Approximate Cost of Funds.
The Good Faith Estimate and the Initial Truth-in-Lending Disclosure will be replaced with the Loan Estimate and the HUD-1 and Final Truth-in-Lending Disclosure will be replaced with the Closing Disclosure. Both of these forms will be consumer friendly and will take on a similar look and design establishing a sense of familiarity for the consumer.
Both new disclosures will include a new term, Total Interest Percentage or “TIP.” Though different than the TIP provided to the food server at your favorite restaurant, it does show the borrower the percentage of total payments made over the life of the loan that is interest and for a normal 30 year loan this can be in the high 60s. The new term Approximate Cost of Funds (ACF) is found in the Closing Disclosure and reflects in a percentage how much the borrower is paying in non-loan related charges.
Most of the soon to be replaced disclosures have been part of the mortgage lending industry for almost 40 years. We have grown accustom to their presence, but as we move forward these new disclosures will not only change the appearance of our documents, they may also provide something we’ve long needed, disclosures a borrower might actually understand.