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.
Turn on you local news, pick up a newspaper, read any blog or even listen to President Obama, the economy is in a serious recession and your business is likely to decline and possibly fail. Prepare yourself, cut your expenses, trim your staff and pray you can make it. Is this how you feel each and every day? I know I have and I’m starting to resent it. Unfortunately, much of the financial crisis we’re experiencing is nothing more than a self-fulfilling prophecy.
I’m reminded of a fable I heard a very long time ago.
Mr. Battaglia had a flourishing hot dog stand on Rt. 38 on the edge of a very busy shopping center near Lombard. He had signs extending every few miles from Chicago to Geneva. They read: Stop at Battaglia’s! We Serve the Best and Largest Hot Dogs in the Midwest, Tasty Char-Grilled Franks with a Sauce from a Cherished Family Recipe. He ran ads in the newspapers and handed out circulars in the cities around him. His hot dogs and service were good and his business was BOOMING. Things could not have been better.
He decided to expand. He met with a financial consultant who had an MBA from one of the larger business schools. The consultant, after hearing Mr. Battaglia’s expansion plans, said “All of the financial writers and even Washington say that the business outlook isn’t bright. We’re on the brink of a serious recession, there is double digit inflation, money is tight and expensive, there is an energy crisis and people won’t drive to your hot dog stands. It would probably be wiser to think in terms of a holding action and even a cut back in expenses.”
Mr. Battaglia, who didn’t have a great deal of formal education, respected the learned counsel of his advisor. He went back to his hot dog stand and tried to think of ways to cut costs to prepare for the oncoming recession. What to cut? Not the hot dog and bun orders — he needed those for his present business. He decided one of the expenses he could cut immediately would be the newspaper advertising and the circulars. He stopped these services immediately. He realized that the consultant’s advice was sound because within four weeks his sales began to drop. He thought to himself, “The consultant and financial forecasters are really smart. The recession is beginning.”
To cut expenses even more, he decided to take down half the signs which would cut his sign maintenance costs. At the end of two months his business was down 40%. “This recession is really serious,” he told his family, “but I’m going to give it one last try.” He took his diminishing capital and put the road signs back up, began advertising in the newspaper and passing out circulars again. At the end of three months his business was once more booming. He was thankful that the recession was so short-lived and that he survived it.
What part of your financial difficulties could be answered in a simple fable?