I have been spending time recently kicking the tires of a new Web site, MortgageGrader.com, which has excellent credentials. It has been developed by Jeff Lazerson, an experienced mortgage broker who didn’t much like the way most brokers did business.
Lazerson persuaded the Ford Foundation to back an approach designed to eliminate opportunistic pricing — the widespread practice of basing the price on what brokers believe they can induce borrowers to pay. Mortgage Grader (MG) is an equal opportunity mortgage lender, developing prices mechanically by sifting through the offers of participating lenders to find the best deal.
A good way to understand what makes MG tick is to compare it with Upfront Mortgage Brokers (UMBs) and Upfront Mortgage Lenders (UMLs). UMBs are brokers who operate transparently, while UMLs are online lenders who provide the information needed by borrowers to shop effectively. MG has much in common with both, but also differs from them in important ways.
MG and UMBs both practice broker-fee transparency, and pass through to the borrower the best wholesale price they can get from the lender. This sets them apart from most brokers, who quote all-in prices that include an undisclosed markup.
There is a difference, however. Where UMBs negotiate their fee with the borrower, the MG broker fee is fixed, changing only with the loan amount, and is disclosed in a fee schedule. This eliminates the possibility of adjusting the broker’s fee to the anticipated workload involved in the transaction. I consider that a small price to pay, however, for the elimination of all possibility of opportunistic pricing.
UMBs and MG guarantee the lender fees disclosed to the borrower, and credit the borrower with any rebates received from the lender. Both lock the rate and other terms when directed by the customer, and provide a copy of the written confirmation of the rate lock as soon as it has been received from the lender.
MG also has much in common with UMLs. Both depend on the Internet as their primary source of customers, and rely on technology to exchange information online with borrowers. Both provide mortgage price quotations adjusted for the particulars of each transaction. But they part company in what they require of the borrower before providing the prices.
UMLs require no more information from the borrower than is needed to price accurately, which in every case involves an input form on one screen that takes a minute or two to fill out. This makes it easy to shop one UML against another, or against other online lenders. The UML certification requirements were designed to this end.
MG, in contrast, requires that the borrower fill out an application form that is contained on five screens, which took me about 15-20 minutes. That is a small investment of time for someone applying for a loan. It is a large investment, however, for someone in shopping mode who is visiting multiple Web sites and who will be coming back frequently, either to check different programs or to keep abreast of an ever-shifting market.
The problem is aggravated by the failure of MG to provide users with a way to save their inputs, and they disappear from the computer after an hour. That is up from 20 minutes; Jeff extended it after I complained, but what is needed is more like three weeks. There is no reason to save the prices; they will change every day anyway and take only seconds to calculate, but I found having to re-enter five screens of personal data every time I wanted to take another look at the prices extremely annoying.
Since MG cannot easily be shopped against other online sites, it is essentially directed to borrowers who have decided to get their loan from one loan provider. This requires a certain amount of faith that they will fare well on MG, without checking competitors. Is such faith justified?
I set out to do a comprehensive set of price comparisons against five UMLs, covering a variety of market niches, which I hoped would answer that question. Unfortunately, I was able to complete only a few before MG bounced me off, and I was disinclined to make it my life’s work. In the few I did, MG did not have the lowest price but they were in the ball park.
The large amount of data MG requires borrowers to provide before they can get prices, which I found so irksome, does have one advantage for borrowers: It allows MG to better assess whether the borrower meets the lender’s underwriting requirements. Their prices are therefore less likely than those of UMLs to require adjustment later in the process.
Bottom line: If you prefer to select one loan provider rather than spend time shopping, MG looks like a good choice. Right now, they are licensed in California, New York, Florida and Idaho.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
