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.
Blogs and websites have been on fire since the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. Though many mortgage lenders and mortgage loan originators (MLO) are still unclear as to the total impact of this new law on their income, there are a few elements of the law that are known and will affect every mortgage loan originator. The compensation provisions of the law go into effect on April 1, 2011 and set up new provisions for all MLOs. Although the industry experienced new disclosure requirements with the new Good Faith Estimate (effective 1/1/2010), and the inclusion of yield spread premium (YSP) into the Origination Charges, followed by a credit of the YSP to the borrower, established the new way of disclosing these fees, the MLO still financially benefited from YSP. That compensation process will come to an end. Also, the ability to price a loan differently due to loan size or complexity will not be a pricing option effective April 1st. All loan origination compensation must be computed on the loan amount and cannot be adjusted for a difficulty factor. Additionally, origination compensation must be paid by either the borrower or the lending source, not both.
Though these changes will affect pricing policies for many mortgage companies and MLOs alike, they are not the end of our industry, but rather a signal for the need to alter operations. The mortgage industry over the past several decades had become bloated with under-trained individuals earning incomes that rivaled physicians and attorneys. Unharnessed revenue structures allowed unskilled MLOs, untrained processors and managers to maintain high incomes without sufficient industry knowledge, all at the consumer’s expense. Mortgage lenders could afford to maintain an unskilled workforce as per loan profit margins negated a need for sufficiently trained employees. Mortgage lenders of all sizes will now need to evaluate the cost of loan originations. A need to streamline origination and processing functions will become critical. Each dollar saved in the process becomes an additional dollar of profit and a potential compensation dollar. The need for a MLO to understand everything about the origination/processing procedures and to efficiently compile a closable loan file from the point of origination will be essential, if the MLO wishes to maintain a reasonable earnings per hour spent compensation. Effective training programs for all MLOs and processors will become an equally essential part of every successful mortgage lender’s operations. The once neglected training area will be at the forefront of every profitable mortgage lender’s staffing protocol. The days of unskilled, under-educated production and ops staff are gone. The ability for mortgage companies to retain employees who are sufficiently trained, will become increasing more difficult. As per-loan revenues fall, additional profits will only be achieved through greater efficiency and higher skill set of their workforce.
Though the Dodd-Frank Bill set out to achieve consumer protection through the establishment of compensation limits, the new law will also reach well into the operations of every mortgage lender. Along the way the law might possibly not only change the operations of the lender, but may also ignite changes that will improve our industry forever.