Monday, December 20, 2010

Shop Til You Drop

During these few final days before Christmas, tis the season to go shopping.  Packed malls, crowded stores and slow websites, remind us that there are deals to be had in a world in which Christmas has become the biggest shopping season of the year.  And there is no shortage of eager shoppers ready to look around for the best available bargains.  Unless, of course, all you want for Christmas is a new house.

According to a new survey just released by Lending Tree, 96% of Americans make it a practice to comparison shop.  For instance, when shopping for a computer, shoppers will often research 3.1 models before selecting the model they purchase.  But almost 40% of those surveyed said that they obtain just one quote for a home loan.  The survey, conducted by Harris Interactive, compiled online results for 1317 respondents.

The survey results indicate that the lack of shopping is not because borrowers believe that they have gotten a good deal.  Rather, fewer than three in 10 consumers, "feel very confident that they received the best deal on their current mortgage."  While 85% of consumers comparison shop for interest rates on the web, only 21% look there first. 

The primary reasons that otherwise comparison shopping consumers gave for not shopping their mortgages is frustration with the process and the second reason that they provided is the time-consuming nature of the mortgage shopping.  Over 70% of those surveyed said that they spent less than one day shopping for their mortgage loan.

These survey results are supremely ironic in view of the fact that the entire justification for changing the good faith estimate in January was to facilitate shopping.  By changing the good faith estimate from an estimate to a binding contract and requiring that the lender guarantee the terms for 10 days, consumers had a firm guideline with which to shop their mortgage loans.  The entire process was designed to almost guarantee shopping.  So why, when 23% of consumers recognize that they can save a considerable amount of money with a lower interest rate, are consumers not taking advantage of the new tools and shopping their loans aggressively?

The president of Lending Tree, Doug Lebda, believes that it is because lenders need to provide still more disclosure and more borrower education.  I disagree.  The problem, in my opinion, is not lack of information--it is lack of options.  When there were many options available to consumers they did shop aggressively.  Their real estate agents shopped aggressively on their behalf.  It was unusual for qualified buyers to get right up to closing and inform the loan officer that they had been offered a better rate and that if the loan officer failed to match the new lower rate they were switching lenders.  Loan programs and loan officers were plentiful, so consumers perceived that if they were being treated unfairly, they could just walk away.

Today the atmosphere is quite different.  Loan approvals have become so difficult to obtain that if a consumer gets approved, they don't want to risk switching lenders and not getting their loan at all.  As guidelines continue to tighten and standards become more strict, consumers are less likely to shop.  Add to that the fact that competition is continuing to disappear, so there are fewer independent companies to rate shop to, and also the fact that many large lenders are still collecting up front fees from borrowers even though this is a clear violation of new truth in lending laws.  (I recently talked to a previous borrower of mine who had gotten a rate quote through his current mortgage servicer.  The current servicer informed him that they would not even talk to him unless he paid them a $300.00 application fee.  This fee was prior to issuing any disclosures.  Although I explained to my borrower that legally the lender is not allowed to do this, his $300.00 was still gone.)

If we want to encourage rate shopping, we have to create an environment in which borrowers perceive that they have options.  Consumers look at 3.1 computers before making a purchase because computers are widely available.  If mortgages ever become widely available again, consumers will shop more seriously for those as well.

ADDITIONAL NOTE:  On Friday I wrote about Payne County Bank in Oklahoma which was ordered to remove all of its religious and Christmas-oriented items from the lobby by the Federal Reserve.  It seems that after being contacted by a lot of people, the Federal Reserve has now reversed its position and will allow employees to wear their Merry Christmas pins and the bank to put its Bible verses back on the website.  As in the story, the Grinch appears to have learned the error of its ways.

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